October 5, 2022

2 oil stocks poised to benefit from OPEC production cuts

Just a month after increasing oil production by 100,000 barrels per day, OPEC is expected to reverse to August production levels via a token production cut of the same volume throughout October. The move was approved in a short meeting on Monday, pushing oil prices up about 3%. Despite some negative impact on the energy sector, solid oil companies in the United States, such as Schlumberger and Hess Corporation, are the most likely to take advantage of the opportunities that should open up.

Why is OPEC cutting oil production?

Until a few hours ago, OPEC was expected to keep oil production steady this year, partly because of Russian resistance to an oil production cut and partly because the cartel agreed to d increased production by 100,000 barrels last month. It turns out that OPEC did, after all, defy Russia in a surprise move.

Russia, which sells its oil to Asian countries at reduced prices after being shunned by the West, had strongly opposed the production cut, arguing that oil-consuming countries would immediately assume that the cuts are due to a supply surplus in the world. This sentiment can hurt Russia’s leverage with its Asian buyers.

However, OPEC has a larger vision in mind, which prompted the decision. At a meeting last week, OPEC discussed the implications of a recession-fueled drop in demand and another unpredictable episode of COVID-19 lockdowns in major countries. The group predicted that for the rest of this year and next, the world is expected to experience a supply glut of around 900,000 barrels per day due to slowing demand. Thus, a reduction in production makes sense to reduce this surplus.

As to why this production target is critical in determining global oil prices, the U.S. Energy Information Administration reveals that OPEC members account for approximately 40% of global crude oil production. . In addition, export volumes from OPEC members represent about 60% of the total oil traded internationally. Sheer market dominance drives OPEC’s production decisions to influence oil prices.

Other developments in the oil sector

Besides OPEC’s decision to cut supply, another hope for a better global oil supply was stymied when stimulus plans from the 2015 nuclear deal between the West and Iran, in which the latter country’s sanctions would be lifted to allow oil trading, ran into a complication. .

Last Friday, the White House rejected Iran’s request for the closure of investigations by the UN nuclear watchdog. This means that the West must wait longer for the United States and Iran to reach a mutually beneficial agreement before Iran can start exporting oil again and improve global supply.

Back home, a Wall Street Journal search also found that the Biden administration had leased the lowest area of ​​land for oil drilling during the president’s first 19 months in office. This reduces the chances of the United States becoming self-sufficient in oil production.

Not to mention that the Russian-Ukrainian war shows no signs of an imminent end, fueling the global shortage of gas supplies.

Overall, the decline in oil production both internationally and domestically places the responsibility of meeting domestic oil demand on the shoulders of a handful of companies. This opens up solid opportunities for the following oil stocks.

Hess Company (NYSE: HES)

The global energy company Hess Corporation is primarily engaged in the exploration, production, refining and marketing of crude oil, liquid natural gas and natural gas. Tailwinds in the energy sector this year have led HES stock to appreciate around 59% year-to-date.

Additionally, during the second quarter, Hess also contributed 50 wells, demonstrating its efforts to increase production. The company plans to increase its production rates in the Bakken region to around 200,000 barrels per day by 2024.

Is HES stock a buy?

Barclays Analyst Jeanine Wai recently maintained a buy rating on the stock, saying initial fears that the alternative minimum tax would negatively impact oil exploration companies considered tax “havens” are proving unhelpful. Indeed, despite the tax, companies like Hess comfortably maintain strong cash returns.

Wall Street strongly believes that Hess has a long way to go. HES stock has a consensus strong buy rating based on eight buys and one hold. On average, Hess’ target price stands at $140.22, indicating a 16% upside from current price levels.

Oilfield services company Schlumberger’s technology and solutions for the production, drilling and processing of crude oil and natural gas have served the oil and gas industry for 96 years. Offshore exploration and activity has accelerated in recent months, keeping demand for the company’s offerings high.

The company recently raised its full-year revenue forecast due to likely traction in a multi-year bull cycle.

Additionally, in its commitment to a clean environment, Schlumberger launched its new business in March, Schlumberger End-to-End Emissions Solutions, whose technology will help the oil and gas industry produce oil without methane. This has recently attracted the interest of environmental investors.

Additionally, as the global gas shortage triggers more production activity at domestic exploration companies, demand for Schlumberger’s technologies is expected to remain high.

Is SLB stock a buy or sell?

In July, Evercore ISI analyst James West reiterated a buy rating on SLB shares and raised the price target to $54-$51. Additionally, the Wall Street consensus is bullish on SLB, with a Strong Buy rating backed by 11 Buys. Schlumberger’s stock price forecast indicates an average price target of $50.82, indicating 33.49% upside potential.

Conclusion: Oil will always get back on its feet

Currently, the commodity market is volatile, and there is a lot going on in the oil and gas sector. The oil supply crisis that is pushing oil prices higher (further fueling global inflation) could have a positive effect on oil inventories at this time. However, experts are of the opinion that if a recession hits, the economy will drag down demand for oil with it. This could be a short-term concern for oil companies. However, if history is anything to go by, oil demand still manages to pick up steam.

The world still has a long way to go before the automotive sector and other oil-intensive industries can fully replace oil with alternative forms of energy. So it’s safe to say that fundamentally sound oil companies like Hess and Schlumberger can make good long-term investment choices.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.