Please ensure Javascript is enabled for purposes of website accessibility

OPEC's Extension Could Fuel More Gains for These 5 Oil Stocks

By Matthew DiLallo – Updated Jun 8, 2020 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With OPEC providing additional support for the oil market, crude prices could have much further to run.

OPEC and its non-member partners have agreed to extend the initial rate of their historic production reduction agreement through the end of next month. The group of oil-producing nations will also make up for its shortfall in May as the non-compliant members will deliver deeper cuts over the next three months. This agreement will significantly reduce oil supplies over the near term, giving the global economy more time to burn off its excess inventory. 

Despite some non-compliance issues, OPEC's initial agreement accomplished its mission as oil prices screamed higher in May. WTI, the main U.S. oil benchmark, zoomed 88% last month, with that rally continuing in June, pushing it up near $40 a barrel. WTI could keep rallying because of the extended support, which would likely fuel more gains for U.S. drillers. Here are five oil stocks that stand out as potentially big beneficiaries of OPEC's extension.  

Multiple oil pumps at sunrise

Image source: Getty Images.

Just what the doctor ordered

Continental Resources (CLR 2.20%) had to shut-in 70% of its production in May because oil prices collapsed, and it had no hedging contracts in place for protection. However, with oil prices booming over the past month, Continental will be able to restart those pumps. That would fuel an acceleration in its cash flow, giving it the funds to repay debt and potentially repurchase its stock.

While shares have rebounded 35% over the past month, there're still down about 45% for the year, implying ample potential upside.  

Restarting the engine

Parsley Energy (PE) shut down its drilling program and shut-in some of its oil pumps when crude prices crashed earlier this year. However, the company now plans to restart most of its shut-in wells this month following WTI's epic rebound in May.

Meanwhile, with WTI around $40 a barrel, it's within the level that Parsley Energy set to restart its drilling program. Because of that, it's well-positioned to capture higher oil prices during the second half of this year, which could drive more gains in its stock following its roughly 30% run over the past month. 

Unleashing the gusher

Devon Energy (DVN 8.65%) built its business to survive ultra-low oil prices. Thanks to oil hedging contracts and an asset sale, Devon expected to generate $300 million in positive cash flow this year, assuming WTI averaged $20 a barrel. However, thanks to OPEC, WTI is now more than double that price point and poised to head higher. Because of that, Devon will generate even more cash.

The company already has a cash-rich balance sheet that stood at $1.7 billion at the end of the first quarter. That gives it the flexibility to accelerate its drilling program or repurchase shares.

Either option could provide more fuel for its share price, which has already rallied over 20% in the past month.

The fuel needed to restart its growth engine

Diamondback Energy (FANG 7.52%) paused its drilling program when crude prices collapsed earlier this year. It also curtailed about 15% of its output in May. However, the company said that thanks to its ultra-low operating costs, it only needed WTI to rebound into the low $30s to resume its drilling activities.

With oil now well above that level, and further upside possible thanks to OPEC, Diamondback Energy could soon restart its idled wells and drilling rigs. That would likely fuel accelerated cash flow growth, potentially driving more gains in its stock, which has already rallied about 30% over the last month. 

Reversing the reductions

Marathon Oil (MRO 10.59%) cut its spending deeply when oil prices cratered this year.

The company suspended its dividend and share repurchase program and slashed its capital spending program. However, with crude prices back to around $40 a barrel, Marathon could start reversing some of those decisions, with it likely starting by resuming its capital return program. That catalyst could provide an additional boost to Marathon's stock, which has already rebounded more than 30% over the past month. 

The worst seems to be over

OPEC is going out of its way to support the oil market. Not only did it extend its initial deep cut through the end of next month, but it's also forcing non-compliers to make up their shortfall. Those actions will give the economy more time to burn off the excess inventory that weighed on prices earlier this year.

Because of that, oil prices appear as if they have further to run. That's great news for U.S. oil companies since they'll benefit from the improved pricing. Higher prices, combined with catalysts like restarting idled drilling pumps and suspended capital return programs, could send shares of top producers even higher in the coming months.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Continental Resources, Inc. Stock Quote
Continental Resources, Inc.
$68.28 (2.20%) $1.47
Devon Energy Corporation Stock Quote
Devon Energy Corporation
$65.33 (8.65%) $5.20
Marathon Oil Corporation Stock Quote
Marathon Oil Corporation
$24.97 (10.59%) $2.39
Diamondback Energy, Inc. Stock Quote
Diamondback Energy, Inc.
$129.52 (7.52%) $9.06
Parsley Energy, Inc. Stock Quote
Parsley Energy, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.