Last week, crude prices tumbled on the heels of several reports suggesting that OPEC and Russia were working on a deal to boost oil production and help offset some of the lost output from Iran after President Trump promised to impose "powerful" sanctions. The reports suggested that the partners could add between 700,000 to 1 million barrels per day (BPD) of production later this year to help keep the oil market in balance. That news knocked oil off its perch of more than $70 a barrel and back into the mid $60s, taking several oil stocks with it.
However, according to a new Reuters report, a more recent source within OPEC suggested that the organization and Russia plan to stick with their pact to keep a lid on production until at least the end of the year. While the source said OPEC would raise output in a "gradual and deliberate fashion" when needed, the oil market is still moving toward balance, which is why it's "not ready yet to fully lift controls."
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Drilling down into the current oil market
Overall, the oil market is almost balanced, according to the latest report from the International Energy Agency (IEA). During the first quarter, oil supplies averaged 96.6 million BPD while demand was 96.24 million BPD. Meanwhile, global stockpiles stood at 2.819 billion barrels, which marked the lowest level since early 2015 and was just below the five-year average. These numbers show that oil market fundamentals are the strongest they've been in years.
However, there are concerns that the oil market has strengthened too fast. The big uptick in oil prices over the past year has started to cool off what had been red-hot demand, which the IEA now sees growing by 1.4 million BPD this year, down 100,000 BPD from its initial view. Supplies, meanwhile, could take a significant hit from new sanctions on Iran as well as continued production problems in Venezuela. Those potential supply issues are why there have likely been talks between OPEC and Russia about possibly boosting output before the year's end so that oil prices don't rise too much higher and really start curbing demand.
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Three oil stocks that can win no matter what OPEC does
With the mixed signals coming out of OPEC, oil prices could be quite volatile until the organization makes it clear what it intends to do. That could have an effect on financially weaker oil companies that desperately need higher oil prices to provide them with extra cash to firm up their financial foundations. Stronger producers, on the other hand, should continue to do well no matter what OPEC decides since they built their businesses to thrive at much lower oil prices. Three that stand out are ConocoPhillips (COP 0.39%), Anadarko Petroleum (APC), and EOG Resources (EOG 0.67%).
Each of those oil stocks spent the past few years reshaping their portfolios and cost structures so they could grow at $50 oil. In ConocoPhillips' case, it can increase production at a 5% annual clip through 2020 at that price point, while boosting cash flow at an even faster 10% compound annual rate. Meanwhile, Anadarko sees its oil output rising at a 10% to 14% compound annual rate over that time frame, and EOG can increase its U.S. oil production at a more than 15% compound annual rate.
With oil currently well above their baseline level, all three are on pace to produce significant free cash flow this year, with each one likely to generate more than $1 billion in excess cash if crude averages just $60 a barrel. Because of that, these oil companies will have more money to return to shareholders, which is why all three boosted their dividends, while ConocoPhillips and Anadarko are also buying back billions of dollars in stock. In addition to that, all three expect to pay off a significant amount of debt in the coming years, with EOG planning to reduce its already low debt level by nearly half. Because of their ability to grow production, return cash to shareholders, and improve their financial profiles at lower oil prices, these oil stock should continue excelling no matter what OPEC decides, making them ideal ones to consider buying amid the market's current uncertainty.
