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Will US Shale Players Gain From OPEC’s Deal Extension?

Zacks

The Vienna meeting between 14 OPEC members and crude exporters outside the cartel, headed by Russia, has been quite a breather for energy investors. The crude output cut deal extension beyond the January-to-March quarter of 2018 is expected to drive oil prices outside the bearish territory.

The move was taken in order to fight the global crude glut that affected the energy market for more than three years, leaving oil explorers with weak balance sheets. In fact, many upstream players were facing difficulties in continuing operations after oil started hitting multi-year lows post mid-2014.

We believe that this measure taken by OPEC and Russia will benefit U.S. shale players. Drillers in the domestic shale resources will cash in on the favorable crude pricing environment to strengthen their financials. Most importantly, the rebound in exploration activities in the domestic shale segment will boost oil supply and partially nullify the impact of the OPEC agreement.

OPEC Extends Deal as Expected

On Nov 30, OPEC members met non-OPEC players to decide on an extension of the crude production cut accord, first signed in late 2016, beyond the first quarter of 2018. More than 20 oil producers, including leading exporters like Russia and Saudi Arabia, participated in the meeting.

As expected by most analysts, all crude exporters decided to extend the deal through 2018-end. Through the end of next year, Saudi Arabia, Russia and their allies pledged to put 1.8 million barrels a day of crude oil out of the market.

The crude price chart of oilprice.com clearly showed that following the conclusion of the Vienna meeting, on Dec 1, West Texas Intermediate (WTI) oil traded at $58.72 per barrel on 9:51 am CST, close to $59.05 — the highest since mid-2015.

Boon for US Shale Drillers

The extended agreement is driving oil toward bullish territory. This is a blessing for domestic shale companies as favorable crude pricing has made exploration operations lucrative.

With more profit, shale drillers will be able to lessen their debt, which has been accumulating since the crude-weakness era after mid-2014. Also, domestic explorers might resume returning cash to stockholders through dividend hikes and share repurchases.

Which Oil Stocks to Pick?

Oil drillers are flocking to U.S. crude resources, per the latest report by Houston-based oilfield services player Baker Hughes, a GE company BHGE. Rigs engaged in the exploration and production of oil and natural gas in the United States totaled 929 in the week ended Dec 1 — higher than the prior week’s 923. This marked an increase for four consecutive weeks after the tally fell for five weeks in a row.

Hence, investing in fundamentally sound shale drillers is likely to be prudent. We have employed our proprietary Stock Screener to shortlist four stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Based in Minnetonka, MN, Northern Oil and Gas, Inc. NOG has exploration and production operations in the Bakken shale, and contributed significant crude production in the last four decades.

The company sports a Zacks Rank #1, and has managed to beat the Zacks Consensus Estimate in three of the last four quarters, with an average positive earnings surprise being 175%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Fort Worth, TX, Approach Resources, Inc.’s AREX upstream operations are concentrated in the lucrative Permian shale play.

The Zacks #2 Ranked company is expected to post year-over-year earnings growth of 65.4% in 2017.

Headquartered in Midland, TX, Concho Resources Inc. CXO has vast exploration and production operations in the Permian shale play.

The company currently carries a Zacks Rank #2. It has surpassed the Zacks Consensus Estimate in the last four quarters, the average positive earnings surprise being 118.6%.

WildHorse Resource Development Corporation WRD, headquartered in Houston, TX, has oil producing acres in the Eagle Ford shale region.

The company, with a Zacks Rank of 2, is expected to witness year-over-year earnings growth of 276.3% in 2017.

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