Interactive Investor

Oil rally is chance to trouser profits at this top 100 company

6th October 2021 12:41

Rodney Hobson from interactive investor

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Up 160% in under a year, and with the world becoming a greener place, there is a strong argument for taking some money off the table at the $100bn giant.      

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

While environmental campaigners fight to bring the use of fossil fuels to a speedy end, oil, and to a much greater extent gas, will be around for years to come. Deals between rival producers will continue to be an important part of the way the sector continues to do business. Like it or not, shale drilling will also continue to play an important role.

Oil companies took a particularly big hit during the pandemic as demand fell off a cliff, taking the price of crude with it. Users were actually paid to take oil off tankers and out of storage facilities because the glut became so pronounced.

How circumstances have changed in the past 18 months. Major economies across the globe have bounced back faster and further than expected, while OPEC, the cartel of oil-producing companies, has refused to accelerate production to meet the extra demand. Users switching from gas to oil is estimated to have added 500,000 barrels a day to oil consumption.

Meanwhile, hopes that a rapprochement between the US and Iran would bring Iranian oil back into world markets have failed to materialise.

US crude oil prices have risen to their highest level in seven years at almost $80 a barrel. It is worth noting that each extra $1 a barrel in revenue for oil producers drops mostly through to the bottom line.

The latest big deal is the $9.5 billion acquisition by ConocoPhillips (NYSE:COP) of assets of Royal Dutch Shell (LSE:RDSB) in the Permian Basin in the southwestern part of US, stretching 300 miles by 250 miles across Texas and New Mexico.

Conoco, based in Texas, is now one of 100 largest companies in the US, valued at almost $100 billion. It produces 727,000 barrels of oil and 2.4 billion cubic feet of natural gas a day, mainly in the US, but with smaller operations in Norway, the Asia-Pacific region and the Middle East.

The deal will add 200,000 barrels of oil a day to Conoco’s output, making it the second-largest oil and gas producer in what is known as the Lower 48 states, that is mainland US except for Alaska. This moves Conoco above Chevron (NYSE:CVX), EQT Corp (NYSE:EQT), Occidental Petroleum (NYSE:OXY) and EOG Resources (NYSE:EOG) and just behind Exxon Mobil (NYSE:XOM), which is expected to produce about 1 million barrels a day from the Lower 48 this year.

Source: interactive investor. Past performance is not a guide to future performance

The price is admittedly a bit on the high side and the field yields high carbon oil, the type that European producers are moving away from as environment campaigners demand greener energy. However, at least the field is in production so there is an immediate revenue flow. In addition, adding this acquisition to Conoco’s existing acreage will allow a more efficient and therefore less expensive extraction of oil.

At the same time. Conoco is cleverly exploiting interest in its oilfields outside the US to sell off its international assets from a position of strength rather than conducting a fire sale.

Share prices in the sector have on the whole fully recovered from the big dip suffered during the first three months of 2020. Conoco slumped from $65 to $25 but those brave enough to buy at the bottom have seen their holding bounce back to $72. After an increase in the dividend at the end of September the yield is 2.4%, but the price/earnings ratio of 63 is pretty demanding. A lot is riding on the Permian acquisition.

Hobson’s choice: the long-term problems facing oil producers in an increasingly environmental-conscious world will not go away, and there is also the fear that production will be stepped up either within or outside OPEC. The current Conoco share price is an opportunity to take profits.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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