A Trio of Turnarounds in Big Oil

11/25/2019 5:00 am EST


George Putnam

Editor, The Turnaround Letter

While the broad stock market reaches for new all-time record highs, companies that produce oil and natural gas remain heavily out-of-favor, observes George Putnam, editor of The Turnaround Letter.

With Big Oil stock prices down by as much as 60% since oil prices peaked at over $100/barrel in mid-2014, several look like high-yielding bargains.

For nearly a decade, BP (BP) has focused on recovering from the 2010 Deepwater Horizon disaster. While the total costs from that disaster will likely reach $65 billion, the 2016 final settlement removes the weighty overhang. 

BP has repositioned itself for steady 4-5% annual production growth, combined with more competitive downstream operations. Its already-healthy free cash flow, helped by its 19.75% stake in Russian energy firm Rosneft, should be further bolstered by lower operating costs and higher capital spending efficiency.

Annual $2 billion Deepwater Horizon settlement payments will step down to $1 billion next year and beyond. Temporarily elevated debt from its $10.3 billion acquisition last year of BHP’s U.S. onshore operations is being repaid by proceeds from an on-going divestment plan. 

The company resumed paying dividends in cash-only and committed to repurchasing shares to offset dilution from the past few years’ scrip dividends.

Chevon (CVX) has held its ground in recent years, bolstered by a well-executed strategy. As a result, it appears poised for free cash flow expansion as production could grow 3-4% a year while capital spending flattens. Their strong Permian Basin presence provides a low-cost, low-risk and high-visibility production base.

Similarly, Chevron’s giant Australian LNG operations are reaching full production which should provide stable revenues for years yet require only minimal incremental capital spending. 

The company anticipates returning much of its  cash flow through steady share repurchases and dividends that offer investors a very respectable 4.0% yield.

While its yield isn’t quite as high as its peers, ConocoPhillips (COP) has arguably stronger fundamentals. Not only does the company have decent production growth, rising free cash flow and a low-risk focus on North America, it has committed to paying out 30% of its operating cash flow each year. 

While the constraint may limit production growth, it addresses a recurring investor concern: that major oil companies tend to squander their capital. Bolstering management’s credibility is that they will pay out most of the cash through buybacks, allowing it some flexibility should oil prices weaken.

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