Crude prices ended 2017 on a high note. West Texas Intermediate (WTI), which is the U.S. oil price benchmark, finished the year above $60 a barrel. The global benchmark, Brent, closed above $66 per barrel. They were up 11% and 17%, respectively. Furthermore, crude rebounded more than 50% from its bottom earlier in the year and ended at a 2.5-year high.
That said, analysts don't expect current pricing to last. The International Energy Agency, for example, warned that 2018 wouldn't be a happy new year for the oil market because it expects supply to exceed demand in the first half. Meanwhile, the U.S. Energy Information Administration (EIA) sees rising U.S. supply pushing down crude prices in 2018. It expects Brent to average $57 per barrel while WTI should be around $53. Those lower prices suggest that 2018 could be a challenging year for oil stocks. However, that might not be the case for all of them, since several can thrive at $50 oil, so anything above that level would be icing on the cake. Here are three that could still be big winners this year even if crude prices deflate.
A cash flow machine at $50 a barrel
Encana (NYSE: ECA) unveiled an update to its five-year plan in mid-October. The company noted that it had pushed costs down to the point where it could prosper if oil averaged $50. In fact, at that level, Encana could grow cash flow by a 25% compound annual growth rate through 2022. Furthermore, its plan would generate a cumulative $1.5 billion in free cash flow over that time frame.
Under Encana's current expectations, it will consume all the cash produced in 2018 on drilling new wells if crude averages $50 a barrel. However, that would set it up to start generating free cash flow by 2019. That said, if the EIA is correct that crude will average $53 a barrel this year, then Encana would start generating excess cash a year earlier than expected. That could potentially allow the company to begin returning more money to investors, through increasing its dividend or buying back stock.
Anadarko Petroleum (NYSE: APC) announced its 2018 budget in mid-November. The company said that it expects to spend $4.2 billion to $4.6 billion on drilling new wells and building out its midstream infrastructure, which would fuel 14% oil production growth in 2018. Furthermore, the company said it could finance that plan within cash flow at $50 oil.
Given that level, Anadarko noted that its plan could generate more than $700 million in free cash flow in 2018 at current crude prices. That possibility for excess cash positions the company to potentially return more money to investors in 2018 beyond its planned $2.5 billion share repurchase program.
A balanced blend of cash returns and growth
ConocoPhillips (NYSE: COP) revealed its three-year operating plan this past October. The U.S. oil giant stated that it expected to spend about $5.5 billion per year through 2020, which would fuel a 5% compound annual production growth rate while driving cash flow up by a 10% compound annual rate. Furthermore, the company noted that it could achieve that growth while also returning significant cash to investors and improving its balance sheet. In fact, ConocoPhillips indicated that it could increase its dividend and repurchase $1.5 billion in stock each year while reducing debt by $5 billion as long as oil averaged $50 a barrel. Moreover, at that price point, it would end 2020 with $5.4 billion in cash, due in large part to asset sales it completed in 2017.
Meanwhile, if oil prices were above that level, ConocoPhillips would generate even more cash. That would allow the company to hit its debt-reduction target even sooner and might lead it to buy back more stock, as it's aiming to return 20% to 30% of its cash flow to investors each year.
Thriving even if the analysts are correct
Many oil analysts don't think that higher oil prices are here to stay, with several anticipating that crude will give back some of its gains in early 2018 due to production outpacing demand. That said, even if oil does fall back into the low $50s, that's plenty high enough to provide Encana, Anadarko, and ConocoPhillips with the fuel needed to finance strong growth rates with room to spare. As a result, these producers could use their excess cash to buy back a boatload of stock next year, which could make them big winners in 2018.
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