Brace yourselves, energy consumers – a new eye-popping forecast is calling for oil prices to blast past $90 a barrel in the coming months. But that pain at the pump could translate into massive stock gains for investors holding the right oil company shares.
Wall Street’s bullish oil outlook comes courtesy of analysts at Bank of America. The investment bank is predicting that both Brent crude, the global benchmark, and U.S. West Texas Intermediate (WTI) crude could rocket up to a lofty $95 per barrel by this summer.
If accurate, those soaring price levels would be the highest for oil since 2014. And they could supercharge profits and stock valuations at certain exploration, production, and services companies in the energy sector.
So what’s behind Bank of America’s ultra-bullish oil call? According to the bank, it’s a perfect storm of circumstances conspiring to create a supply shortfall as demand for oil surges. Let’s break down the key factors that have BofA so giddy about crude’s prospects.
Geopolitical Powder Keg
First and foremost, escalating tensions in the Middle East and other global hotspots are threatening supply. Relations between Western powers and major petro-nations like Russia, Iran, and Venezuela remain highly strained. Any escalation in conflicts or re-imposition of sanctions could quickly cut oil exports.
Russia’s invasion of Ukraine is perhaps the biggest wildcard. Europe has already banned imports of Russian crude, removing a major supply source. If the war drags on or widens further, even more barrels could be taken off the market.
OPEC Playing Hard to Get
Adding fuel to the supply shortage fire are the actions of OPEC, the powerful cartel of oil exporting countries. Despite repeated calls from consuming countries to open the taps, OPEC has refused to significantly boost production.
The group’s most recent decision to trim output by over 1 million barrels per day underscores its intent to keep crude prices elevated. With key members like Saudi Arabia enjoying the fiscal windfall from $80+ oil, OPEC seems unlikely to provide much relief.
Shale Revolution Losing Steam
For over a decade, booming production from U.S. shale plays helped offset OPEC supply cuts and kept a lid on crude prices. But the shale growth engine could be finally running out of steam.
Producers have slashed spending on new drilling as investors demand higher payouts over production growth. The lack of new well completions could soon cause output from hot spots like the Permian Basin to decline after years of torrid increases.
Add in other supply threats like aging fields, a lack of investment in new megaprojects, and naturally declining output from mature assets, and it’s easy to see why oil markets may soon tighten considerably.
That sets the stage for prices to surge much higher if Bank of America’s projection of rebounding oil demand proves accurate.
With that backdrop, let’s look at three specific oil stocks that could be the biggest winners from $95 crude this year:
ExxonMobil (XOM) – An Oil Major Cash Gusher
If oil does reach triple-digit territory in 2024, few companies stand to benefit more than ExxonMobil. As an integrated oil titan, Exxon’s massive upstream production profiles like a cash-minting machine at higher price levels.
The company’s two premiere growth areas are its holdings in offshore Guyana and the Permian Basin of West Texas/New Mexico. ExxonMobil scored yet another major win in Guyana in January, greenlighting a new development that will boost production capacity by 250,000 barrels per day.
Based on the jaw-dropping estimates of over 11 billion recoverable barrels in the region, Guyana could be a multi-decade growth engine for Exxon. With breakevens of just $28 per barrel on these prolific offshore fields, $95 crude would mint obscene profits.
In the Permian, Exxon is targeting over 1 million barrels per day of output by 2027. Its low-cost holdings in the unconventional shale play remain a cornerstone asset with remaining upside.
Awash in cash from loftier energy prices, ExxonMobil could use the windfall to accelerate stock buybacks, boost its dividend, or acquire rivals at bargain prices. For oil bulls, this deeply cash-generative supermajor seems like a no-brainer if oil keeps rallying.
Occidental Petroleum (OXY) – Riding the $95 Oil Debt-Reduction Wave
Smaller independent producer Occidental Petroleum could also thrive in an environment of $95 crude. The company, which is in the process of acquiring Permian shale driller CrownRock, would see its already-inflated cash flows positively gushing at those price levels.
Here’s just how lucrative an extended rally to $95 WTI could be for Occidental:
Every $1 increase in WTI equates to $210 million more in annual cash flow for OXY
A similar $1 gain in Brent adds around $20 million to Oxy’s coffers
Assuming BofA’s forecast is right, OXY stands to generate well over $2 billion in incremental cash flow compared to last year’s levels
Why is this cash gusher so pivotal for Occidental? Two words: debt reduction.
Oxy’s 2019 acquisition of Anadarko saddled the firm with a crushing debt load that remains over $20 billion even after years of repayments. But $95 oil could finally let the company rapidly deleverage its balance sheet to a healthier level.
The CrownRock assets also come with valuable crude hedges already in place, locking in $70+ pricing on a portion of their output. If OXY can lighten its debt burden, the company’s low-cost holdings could shift from drag to powerful income-generator.
So while Occidental is far from a safe bet, its leveraged model gives it immense operating leverage to any spike in crude pricing. $95 WTI could turn this former debt-laden laggard into a cash cow for investors buying ahead of the curve.
Baytex Energy (BTE) – Torrid Small-Cap Upside
Looking for a small-cap lottery ticket play on higher oil? Little-known Canadian producer Baytex Energy could deliver torrid upside if crude surprises to Bank of America’s lofty forecast.
Some quick math illustrates why: Baytex is guiding for around CA$530 million (US$390 million) in free cash flow for 2024. But that estimate assumed just $73 WTI. Run the same figures on $81 oil as BofA projects, and the firm’s free cash flow surges 65% higher to CA$875 million.
What about at $95 crude? Baytex’s output is over 80% weighted to oil, meaning its cash flows would be going into absolute overdrive. In that bullish pricing scenario, the small $3 billion company could realistically generate CA$1+ billion in free cash flow this year alone!
With Baytex still carrying CA$2.5 billion in net debt from its recent acquisition of Ranger Oil, imagine how quickly it could pay down borrowings with those sorts of absurd profit levels. Share buybacks and reinvestment into new drilling would be on the table as well.
Of course, betting on a small, lightly-covered name like Baytex comes with elevated risks versus the oil majors. Production issues, cost blowouts, or an oil slump could all weigh heavily on the firm’s leveraged model.
But for risk-taking investors looking to amplify their gains from any $95 oil spike, Baytex offers immense upside operating leverage compared to its larger brethren. This intriguing small-cap lottery ticket could really hit the jackpot if crude prices blast off as Bank of America foresees.
So keep an eye on oil futures and the global supply/demand picture in the coming weeks. With tensions high, OPEC defiant, and shale growth slowing, even whispers of a shortfall could be enough to finally spark the long-anticipated rally.
And when crude does take off, having a few well-chosen energy stocks in your portfolio could help offset the pain of higher gas prices. For oil bulls, names like ExxonMobil, Occidental, and Baytex may be among the biggest winners from a shocking but plausible scenario of triple-digit oil in 2024.
