Portfolio Review: Oil Producers

In the previous article, I reviewed the five portfolio companies that I classified as natural gas companies. Today, I will do the same for the eight oil producers. Here are those holdings, along with some key metrics for each company, in order of descending enterprise value:

  • EV – Enterprise value at the close on October 13, 2017
  • FCF – Free cash flow
  • TTM – Trailing twelve months
  • EBITDA – TTM earnings before interest, tax, depreciation, and amortization
  • EV/Res – Enterprise value divided by the total proved reserves in barrels of oil equivalent at year-end 2016
  • YTD Ret – Year-to-date total shareholder return (including dividends) through October 13, 2017 

Below is some commentary on each company.

ConocoPhillips (NYSE: COP) is the largest of the group by EV and the largest independent exploration and production (E&P) company in the world. It is also one of only two from the table in positive territory for the year. Since reiterating the Buy for COP on March 23, 2017, shares have returned 11%. Most of the gain was a result of the company selling its Canadian oil sands and natural gas holdings to Cenovus Energy (NYSE: CVE) in a $13.3 billion deal. ConocoPhillips received $10.6 billion in cash and $2.7 billion in shares of Cenovus. Since cutting its dividend in early 2016, the company put itself in position to fund the dividend and buy back shares at current oil prices. COP remains a Buy below $50, but I consider it fairly valued there at prevailing oil and gas prices. 

EOG Resources (NYSE: EOG) has significantly outperformed ConocoPhillips over the past five years, primarily because it lacked a lot of COP’s baggage (e.g., expensive deepwater, oil sands, extensive international operations). EOG has one of the strongest balance sheets in the business and has weathered the period of low oil prices without incurring significant debt. EOG’s oil production more than doubled from 2011 to 2014, but the company has maintained discipline since the oil price crash, focusing only on its most productive drilling locations. After cutting costs, cash flow is on the rise, and the company is poised to greatly benefit when oil prices rise. My biggest endorsement of EOG is that I hold shares in the company. EOG Resources is my top-rated Buy among the oil producers.   

Apache Corporation (NYSE: APA) has been up and down since being added to the portfolio last August. Shares surged when the company announced a three billion barrel discovery in the Permian Basin (Alpine High), but have since sagged after the company announced that it would spend most of its capital budget this year developing this play. Apache further added to investor discomfort by announcing its drilling budget will exceed cash flow by $1 billion this year. Add in lower production guidance as a result of Hurricane Harvey, and investors have punished the company. 

Nevertheless, Apache is cheap by several metrics relative to its peers. The company has bet its future on the Alpine High discovery, but it’s a high-risk bet that will reward investors handsomely if it pays off. Should oil prices recover to $60/bbl, and Alpine High delivers as advertised, Apache’s performance should be near the top among all oil producers. 

Continental Resources (NYSE: CLR) has been in and out of the portfolio, with mixed results, over the past few years. We most recently added it back last November as OPEC prepared to make production cuts in support of higher prices. Continental has long been one of the more leveraged of the major oil and gas producers, and the downturn in oil prices hit them hard. They were forced to cut costs and become more efficient. Today, debt is declining, cash flow is rising, and the balance sheet is improving. Continental made its name in the Bakken (and still derives just over 50% of its production from that region) but has been making a major push closer to home in the Oklahoma STACK, which is so far delivering rates of return above 100%. Continental shares are set to soar as oil prices move closer to $60/bbl, but they are probably stuck in a narrow trading range until then. 

Today, Continental’s debt is declining, cash flow is rising, and the balance sheet is improving. Continental made its name in the Bakken (and still derives just over 50% of its production from that region) but has been making a significant push closer to home in the Oklahoma STACK, which is so far delivering rates of return above 100%. Continental shares are set to soar as oil prices move closer to $60/bbl, but they are probably stuck in a narrow trading range until then. 

Diamondback Energy (NASDAQ: FANG) was my “special pick” at this year’s annual Wealth Summit. These are usually stocks that aren’t already in a portfolio, but that have real potential over the next year. Over the past five years, pure Permian Basin producer Diamondback has grown annual crude oil revenues from $42 million to $470 million, annual crude oil production from 400,000 bbl to 11.6 million bbl, and crude oil reserves from under 20 million bbl to nearly 140 million bbl. Since its 2012 IPO, shares always ended the year higher than they started it — even during the 2014-2016 oil price plunge.

Diamondback seems expensive compared to its peers, but its value is misleading due to a stake in Viper Energy Partners LP (NASDAQ: VNOM) worth $1.2 billion. VNOM is a master limited partnership (MLP) structured on royalty payments from mineral rights. Diamondback is one of only two portfolio oil producers in positive territory year-to-date, but it is poised to continue its rapid growth as oil prices move higher. Diamondback is my second-ranked Best Buy but isn’t suitable for conservative investors. 

WPX Energy (NYSE: WPX) is another that has been in and out of the portfolio with mixed results. We initially recommended it in a profitable trade in August 2013, and most recently added it back in November 2016. WPX has acreage in the Delaware Basin (part of the Permian Basin), the San Juan Basin, and the Williston Basin in North Dakota. Management has guided for 30-40% oil growth until 2020, but the company has struggled to generate positive free cash flow in the current climate. Part of the reason for this is that WPX has spent money hedging its oil production. WPX has hedged 77% of its 2017 production at $50.86/bbl and 50% of its 2018 production at $54.61/bbl. This certainly helps protect the company against more declines in the price of oil, but it also limits the upside potential should oil prices rise significantly. 

For years I considered Whiting Corporation (NYSE: WLL) to be a more conservative version of Continental Resources. The two companies were similar in many ways, but Continental was typically more leveraged. However, in recent years the companies diverged. Whiting doubled down on the Bakken Formation with its acquisition of Kodiak Oil and Gas, which made Whiting the largest Bakken producer. But in the process, the company took on a heavy debt load. That has put a strain on the company, and low oil prices — which are even lower in the Bakken — have made matters worse. Whiting needs oil prices to move up to $60/bbl to thrive. With that risk, its elevated debt load, and with Whiting’s large bet on the Bakken, Whiting ends up in last place among this group of oil producers. 

SandRidge Energy (NYSE: SD) was a company I wouldn’t have touched a few years ago because it was heavily leveraged. That debt eventually pushed the company into Chapter 11 bankruptcy, but last October SandRidge emerged from bankruptcy in much better shape. The company shed $3.7 billion in its reorganization and came out of bankruptcy with zero net debt and more than $500 million in liquidity. The new company was relieved of $300 million in annual interest payments.

SandRidge remains dirt cheap according to almost every financial measure. The company still has more cash on hand than debt. Since being added to the portfolio in May 2017, SandRidge is down 2.5%, but the investment thesis for the company remains intact. The company has decent oil and gas production assets, but lower production costs than its peers due to the reorganization.

In summary, my ranking of the oil producers would look like this:

  1. EOG Resources
  2. Diamondback Energy 
  3. ConocoPhillips
  4. SandRidge Energy
  5. Continental Resources
  6. Apache
  7. WPX Energy
  8. Whiting Corporation

In the next article, I will rank the integrated oil and gas companies and the refiners.

Stock Talk



hi robert, why do you feel that diamondback is not suitable for conservative investors?

Robert Rapier

Robert Rapier

It’s a small company at the mercy of oil and gas prices. If oil prices collapsed (which I think is unlikely), it could see 30% downside which is too much for what I would consider a conservative investor.




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