Last year was a more challenging time for the oil patch than many expected. Crude oil prices cooled off from their war-driven spike in 2022. Lower oil prices weren't what most industry watchers expected when the year started.
Last year's unexpected oil market shows just how hard it can be to predict what will happen next in the oil patch. However, that isn't going to stop a few Fool.com contributors from trying. Here's a look at their bold predictions for Helmerich & Payne (HP +0.81%), Devon Energy (DVN +2.08%), and Chevron (CVX +0.66%), as well as the larger oil market.
1. U.S. shale dominance will temper oil prices
NYSE: HP
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Tyler Crowe (Helmerich & Payne): U.S. shale may be a victim of its success. Over the past several years, shale drilling has gone from a novel, high-cost technological development to a lower-cost production source. Shale drilling has launched U.S. production from a meager 6.7 million barrels per day of crude oil and natural gas liquids in 2008 to almost 20 million barrels per day of the same products today.
What is equally impressive is that many of the companies drilling for the stuff are doing so profitably today. Integrated companies like ExxonMobil and Chevron, as well as independent producers such as Devon Energy and Occidental Petroleum, tout that onshore shale production remains solidly profitable, with prices as low as $50 a barrel or even lower.
This is all great news for U.S. producers and has made them cash-gushing assets. There is a trade-off, though. With production solidly profitable, there is little reason to scale back growth. That, in turn, will likely provide ample supply to the market and prevent prices from rising too much.
What is important, though, is that low-cost production should keep drilling activity high. Rig owners and service crews should remain busy and generate good returns. One such example is Helmerich & Payne. The land rig owner is posting per share results comparable to the height of shale drilling mania, but its stock trades for 8.1 times earnings, and it has a 5.5% dividend yield.
Barring some unforeseen market changes (increased global conflict, global recession, etc.), the oil market probably won't change much in 2024, but the current market is lucrative for equipment and services companies for investors willing to dig into the less covered parts of the oil market.
2. The merger wave continues
NYSE: DVN
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Matt DiLallo (Devon Energy): A consolidation wave has swept across the oil patch over the past year. Exxon really got the ball rolling by agreeing to acquire Pioneer Natural Resources in a more than $60 billion deal. Chevron followed that up by sealing a deal to buy Hess for about $60 billion.
To forecast the wave will continue isn't very bold, since we've already had a couple of multibillion-dollar deals struck this year. However, I will go out on a limb and predict a deal I think could occur this year: I believe a merger between Devon Energy and Marathon Oil makes so much strategic sense that they could strike a deal.
A common thread running through the current consolidation wave is that the deals will increase the combined company's scale, reducing costs. A tie-up between Devon and Marathon would certainly do that because they have a lot of overlap. Devon operates across five U.S. basins (Williston, Powder River, Anadarko, Delaware, and Eagle Ford). It's particularly strong in the Delaware side of the Permian, where it has a world-class resource position.
In many ways, Marathon would fit Devon like a glove. It has operations in the Williston, Anadarko, Delaware, and Eagle Ford basins (along with international operations in Equatorial Guinea).
Combining the two companies would enable them to increase their scale across those four overlapping U.S. resource basins. The greater scale would enable the combined company to develop those resources more effectively, reducing costs and increasing returns. That would help Devon to produce more free cash flow to support its capital return strategy.
In a lot of ways, a deal between Devon and Marathon would mirror Devon's 2021 merger-of-equals transaction with WPX Energy that created the Devon of today. At the right price, a merger with Marathon could create a lot of value for shareholders (Devon has delivered a more than 170% total return since closing its WPX Energy merger).
3. Volatility will continue, but so will profitability
NYSE: CVX
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Jason Hall (Chevron): Tyler and Matt both make some compelling arguments. I especially like Matt's prediction with Devon; whether it's Marathon or another bigger oil company that makes the move, I wouldn't be surprised to see something happen. I also think that a stand-alone Devon could also be a profitable investment if Matt misses the mark.
But I'm going to go in a different direction than both of my colleagues and make the case for Chevron. The oil market is in a bit of a weird place right now. And by weird, I mean completely normal and healthy, something that hasn't really felt normal in recent years, with oil prices falling to "everyone's gonna go bankrupt" lows to "you're gonna make money, and you're gonna make money! Everyone's gonna make money!" highs.
The interesting thing is, the downturn separated the wheat from the chaff, and the lack of easy capital when oil moved back above $100 for a while kept the industry disciplined and healthy. It shouldn't be a bold prediction, but after the past decade, it feels pretty bold to say that even with continued volatility in oil prices, I expect the industry will remain very profitable.
However, it also led to a lot of the typically staid, steady oil stocks like Chevron get bid up to too-pricey valuations. Well, that's changed a bit over the past six quarters, with shares down 20% from the highs. And while not cheap per se, Chevron is now back in the range of good value that makes it a compelling buy.
At recent prices, you can buy shares for around 11 times both last year's and expected 2024 earnings, and earn a dividend yield above 4%. And with exposure to the entire oil and gas value chain, Chevron's cash flows are relatively stable, and the dividend is very safe. If you're looking for a more steady investment in the oil patch, Chevron is back on the buy list.
