In 2017, oil companies in the United States produced an average of 9.3 million barrels of oil per day (BPD). Not only was that the nation's highest level in 50 years, but it put America in a virtual tie with Saudi Arabia as the second-largest oil producing country in the world behind Russia. At the current pace, America's oil output in 2018 will smash the record set in 1970, and the U.S. could overtake Russia as the global oil leader.
Fueling America's oil and gas resurgence has been the torrent of new production from seven key regions: the Anadarko Basin (including the STACK shale play), Appalachia (including the Marcellus and Utica shale), Bakken, Eagle Ford, Niobrara, Haynesville, and the Permian Basin in West Texas. Drillers have been able to tap these resource-rich regions by using a combination of horizontal drilling and hydraulic fracturing to access the oil and gas trapped within tight rock formations such as shale. Among the biggest beneficiaries of America's oil boom has been the country's largest oil stocks:
What is an oil company?
Before we drill down into these specific companies, it's important for investors to know a few basics about the oil and gas industry. The term oil company can broadly refer to any company involved in the oil market, whether it produces oil from wells, transports it by pipelines, or refines it into gasoline. However, when most investors think about an oil company or oil stocks, they typically mean an exploration and production (E&P) company, which, as the name suggests, explores for and produces oil from onshore or offshore wells.
There are two types of E&P companies: independent E&Ps (which only drill for and produce oil) and integrated oil companies that not only produce oil but also operate midstream assets like pipelines and downstream assets like refineries and chemical plants.
The "big" oil companies, which refer to the seven largest in the world, all tend to be integrated oil companies. For a deeper dive into the oil patch, be sure to check out this article for everything you need to know about investing in oil.
With that primer out of the way, here's a closer look at the five biggest oil stocks in the U.S. as well as what the future holds for these oil giants.
ExxonMobil: A big oil giant
ExxonMobil is the largest publicly traded oil stock in the world today. In 2017, the U.S.-based integrated oil and gas company produced 2.3 million BPD of oil and other liquids -- supplying more than 2% of the world's total -- while its overall output totaled about 4 million barrels of oil equivalent per day (BOE/D), which includes oil, natural gas, and natural gas liquids (NGLs). Like most big oil companies, Exxon pumps oil and gas around the world and currently has an active presence in 38 countries.
Drilling down into Exxon's growth drivers
Last year, ExxonMobil produced 514,000 BPD on its home turf, from places like the Permian Basin, Alaska, the Gulf of Mexico, and the Bakken shale of North Dakota. However, the Permian Basin is one of the big keys to Exxon's future. While the company only produced about 129,000 BPD from the region in 2017, it expects output to skyrocket in the coming years. Driving that forecast was its acquisition of another roughly 275,000 acres of land in the heart of the Basin last year for more than $5.6 billion.
Those deals more than tripled Exxon's Permian resource base, which currently totals more than 9.5 billion BOE. That oil-rich position leads Exxon to believe it can grow its production from the Permian fivefold by 2025. While there are some near-term concerns about whether the Permian can grow as fast as oil companies anticipate due to pipeline constraints, ExxonMobil has been working with pipeline companies to ensure it has market access for its production. Because of that, there's less risk that Exxon might miss the mark on its ambitious expansion plan.
While the Permian is Exxon's main growth engine in the U.S., it's not the company's only growth driver. The oil giant also plans to start up 25 major projects around the world over the next several years, which will help add 1 million BOE/D, or by about 25%, to its output by 2025. One of the other key drivers is Guyana, located to the west of Venezuela, where Exxon and its partners have now made nine offshore discoveries that contain more than 4 billion BOE of resources. Exxon is currently planning a three-phase development, which it expects will produce more than 500,000 BPD in the future. However, the oil giant now believes that it could build at least two more phases, which would boost output up to more than 750,000 BPD.
A plan to grow value
Exxon anticipates that the growth from the Permian, offshore Guyana, and elsewhere -- including its refining and chemical operations -- will more than double earnings and cash flow by 2025, assuming no major change in oil and gas prices. This outlook implies that Exxon's stock price could trend upward along with the company's profitability and more than double in the next seven years, assuming investors value its earnings the same way they do now.
Investors could do even better than that if we take the company's high-yielding dividend, which it has increased for the last 35 years, into account. Furthermore, there is a possibility that Exxon could restart its share buyback program. If Exxon can do all that, then America's biggest oil stock could fuel big-time gains for investors in the coming years.
Chevron: A U.S.-focused oil giant
Like ExxonMobil, Chevron is an integrated oil company with operations around the world. In 2017, the company produced 2.7 million BOE/D from the following countries:
Of that production, about 63% was oil, or approximately 1.7 million BPD, with 30% of it coming from the U.S., mainly from the Gulf of Mexico, California, and the Permian Basin. In fact, the California-based oil company is the largest oil and gas producer in the Golden State. However, like Exxon, Chevron's future is in the Permian Basin because it's one of the largest landholders in this oil-soaked region at roughly 2.2 million acres.
Dual fuels in the U.S.
Chevron has already produced 5 billion barrels from the Permian since it set up shop there in the early 1920s. However, its best days appear to lie ahead. While the company's output from the region averaged only around 200,000 BOE/D last year -- which was in the top five -- it expects production to hit more than 650,000 BOE/D by 2022 as it works to unlock the 11.2 billion BOE of resources still underneath its land in the region.
In addition to the Permian, Chevron remains active in the Gulf of Mexico where it produces from several offshore platforms, including a handful of new production facilities online brought online in recent years. While it takes more time and money to develop offshore resources, these facilities tend to produce at steadier rates than onshore wells. That's why the company is working on additional expansion projects and has new developments in the pipeline. Add to that the fact that it continues finding oil in the region -- including recently uncovering one of the largest oil discoveries in the Gulf in the past decade -- and Chevron has a bright future in the region.
A different strategy with the same goal
One thing that separates Chevron from ExxonMobil is their long-term strategies. While Exxon has an ambitious investment plan to increase output by 25% over the next seven years, Chevron's focus is on generating cash flow. Chevron CEO Michael Wirth told the Financial Times in mid-2018 that he wants the company to be able to cover its dividend with free cash flow at $50 oil. As a result, Chevron plans to stress controlling its costs and stick to a strict budget rather than pursuing growth for the sake of growth. So, the company won't increase production as fast as it could in the coming years, instead prioritizing generating free cash flow that it can use to expand the dividend and buy back stock. However, while that approach will yield a lower production growth rate, it could still enable Chevron to grow shareholder value at a healthy clip in the coming years.
ConocoPhillips: The king of the E&Ps
ConocoPhillips is the world's largest independent exploration and production (E&P) company, which means it makes all its money producing oil and gas as opposed to being integrated like Exxon and Chevron, which also operate downstream facilities such as refineries. However, while ConocoPhillips lacks that diversification, it boasts strong geographical diversity -- which can reduce the risk that a regional issue such as pipeline constraints or a natural disaster will significantly impact its operations -- since it currently pumps oil and gas from 17 nations. In 2017, the company's worldwide operations produced an average of 1.4 million BOE/D, though about 37% of that output came from the U.S.
A diversified U.S. portfolio
The largest contributor of ConocoPhillips' U.S. output is Alaska, where it's the largest oil and gas producer. Last year, the company pumped 182,000 BOE/D from the state, accounting for 36% of its U.S. output. Alaska will be even more important to the company in 2018 because it announced two transactions to acquire additional interests in two of the fields it operates in the region, which, along with a recently finished expansion project, should boost its production in the state up to around 250,000 BOE/D. That's part of the company's bold bet on Alaska, which also includes a multibillion-dollar development program that could increase its output to more than 300,000 BOE/D in the next decade.
However, as important as Alaska is to ConocoPhillips both now and in the future, it's not the company's biggest growth driver in the country. Instead, the oil giant's positions in three of the biggest oil-rich shale regions -- Permian Basin, Eagle Ford, and Bakken -- will lead the way in the coming years. After producing about 220,000 BOE/D from those three shale plays last year, ConocoPhillips expects output to nearly double to 400,000 BOE/D by 2020. While the company plans to keep production in the Bakken flat, it expects output in the Eagle Ford and Permian to grow at a 25% and 60% compound annual growth rate (CAGR), respectively, through 2020.
A differentiated plan to create value
Increasing production is only one piece of ConocoPhillips' strategy to create long-term value for investors. The company's primary aim is to grow its highest-margin production so that cash flow will expand at an even faster pace. Because of that, the oil giant's plan to grow production at a 5% CAGR through 2020 should fuel a 10% CAGR in cash flow. That would provide the company with the money to continue increasing its dividend and buy back more stock. In fact, in mid-2018, ConocoPhillips announced that because it achieved its debt reduction target well ahead of schedule, it would boost its share buyback authorization up to $15 billion, which is enough to retire about 20% of its outstanding shares. That needle-moving buyback has the potential to drive ConocoPhillips' stock even higher in the coming years.
EOG Resources: (Almost) nothing but shale
EOG Resources is one of the largest independent E&P companies in the country. However, while it does have operations in Trinidad, the U.K., and China, the U.S. is by far its most important region. In 2017, EOG Resources produced 608,900 BOE/D, with more than 90% of that output coming from the U.S. Meanwhile, 99.5% of the company's 335,000 BPD of oil production came from the States.
EOG Resources currently produces oil from four main regions:
- The Eagle Ford: 157,000 BPD in 2017
- The Permian Basin: 91,000 BPD in 2017
- The Rocky Mountain Area (including the Bakken as well as the DJ Basin and Powder River Basin): 66,000 BPD in 2017
- The Mid-Continent (including the STACK shale play of Oklahoma): 2,000 BPD in 2017
Drilling for returns, not just oil
Aside from its near sole focus on U.S. shale plays, another thing that sets EOG Resources apart from most other oil stocks is that it drills for returns above all else. In February 2016, EOG Resources unveiled its premium drilling strategy, which is a focus on drilling wells that meet a high hurdle of producing a 30% after-tax return at $40 a barrel. As a result, the company can deliver fast-paced production growth at lower oil prices, with it currently able to expand its U.S. oil output at a 15% CAGR on the cash flows supplied by $50 oil and at a 25% CAGR at $60 oil.
Another benefit of EOG's aim to drill for returns over growing output is that it's on pace to produce significant free cash flow at higher oil prices since it won't accelerate its drilling pace if that will impact returns. In 2018, for example, the company can produce more than $1.5 billion in free cash at $60 oil.
Growing shareholder value above all else
The shale giant has a twofold strategy for that excess cash. First, it intends on increasing its low-yielding dividend at a more than 19% CAGR going forward. In addition to that, EOG plans to retire debt as it matures over the next four years, which would see it pay off $3 billion by 2021, nearly halving it from last year's level.
EOG's combination of high-return production growth, high-octane dividend increases, and steady de-leveraging of its balance sheet have the potential to fuel significant gains for investors in the coming years.
Occidental Petroleum: A different kind of integrated oil company
Occidental Petroleum is an integrated oil company with operations in the U.S., Latin America, and the Middle East. In 2017, the company produced 602,000 BOE/D, with slightly more than half of that output coming from the U.S. Occidental is a bit different than most other integrated oil companies in that it doesn't own any refineries. Instead, it has a chemical business and some midstream assets, though it recently cashed in on some of its Permian infrastructure.
The Permian with a twist
Nearly all of Occidental's U.S. production comes from the Permian Basin, where it's one of the largest operators and producers, accounting for about 9% of the region's oil output. However, what's unique about the company's Permian position is that 57% of its oil production comes by using enhanced oil recovery (EOR) to coax more oil out of legacy fields. Occidental primarily does this by injecting carbon dioxide that it produces from other regions of the country into older oil reservoirs to increase the underground pressure so that more oil flows out. Each year, the company pumps more than 950 million cubic feet of carbon dioxide into oil reservoirs, making it one of the EOR leaders not only in the Permian but globally. The oil giant has a large inventory of EOR projects that it expects to develop over the next two decades depending on market conditions, which should keep its EOR output at a relatively steady pace.
In addition to EOR, Occidental has started tapping into the vast shale resources underneath its acreage position in recent years, producing 141,000 BOE/D from its Permian Resources division last year. The company has identified nearly 12,000 drilling locations, with many highly economical at less than $60 a barrel, providing the company with a significant growth driver in the coming years. Occidental aims to get its shale production within its Permian Resources division up to an average of between 220,000 to 244,000 BOE/D by the end of 2018, which would be 45% higher than the rate it produced at the end of 2017.
A low-cost oil stock
That fast-paced growth from the Permian is a key part of Occidental's plan to lower its companywide oil breakeven level to $40 a barrel, which means the company can generate enough cash at that oil price to fund its high-yielding dividend and maintain its current production rate. By hitting that breakeven point, Occidental would then be able to grow total production at a 5% to 8% annual rate with the cash flows it can generate at $50 a barrel while producing ample free cash if oil is above that level, giving it the money to buy back shares. It's all part of Occidental's balanced plan to grow shareholder value in the coming years even if oil prices take another tumble.
The biggest oil stocks still have plenty of fuel in the tank
All five of these large U.S. oil stocks share one commonality: a prime position in the oil-rich, low-cost Permian Basin. That's crucial because it gives them the fuel to grow at a healthy rate in the coming years even if oil prices take a hit. Consequently, the five biggest oil stocks in the country should continue to grow larger in the coming years, not only in production volumes but in value, which positions them to enrich their investors.
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