Two OPEC Members Countries Propose Production Quotas

01/25/2016 10:00 am EST


Michael Berger

President & Founder,

In the past two months, certain key developments helped keep the price of oil lower for longer and increased volatility in the global stock market, however, Michael Berger, of, thinks energy stocks, such as these three on his radar, still look attractive on weakness.

After WTI Crude saw prices rally more than 20% off of its lows from Wednesday last week, oil is giving up some of its gains after Saudi Arabia—the largest exporter of crude oil in the world—said it plans to keep up its investments in energy projects.

Khalid Al-Falih, Chairman of state-run Saudi Arabian Oil Co. said they have not reduced their investment capacity amid lower crude prices and are building a marine cluster in the eastern part of the country. This news caused the price of WTI Crude to fall by more than 4% after initially trading in positive territory.

Expect Oil Prices to Test Recent Lows

In the past two months, certain key developments impacted the state of the global energy industry. These developments helped keep the price of oil lower for longer and increased volatility in the global stock market.

In early December, the price of oil started to sell-off after the Organization of Petroleum Exporting Countries (OPEC) failed to reach a production limit agreement at their meeting in Vienna. The outcome of this meeting resulted in OPEC effectively abandoning production limits to defend market share against non-OPEC producing countries.

Last week, the global oil oversupply situation became worse after economic sanctions were lifted on Iran. That ended a European oil embargo on Iran which has 38 million barrels of oil ready to enter the market. Last Monday, Iran's deputy oil minister said the country will increase oil production by 500,000 barrels a day.

On Friday, the United States Energy Information Administration (EIA) said crude oil inventory increased by 4.0 million barrels. This is much higher than the EIA and Wall Street's estimate of 2.2 million and 2.8 million barrels, respectively.

OPEC Members Propose Production Output Quotas

The collapse in oil prices has impacted the export revenue of all OPEC member countries. While the impact has been felt by all members, some counties have been able to manage their economies better than others.

In a statement published in Ecuador presidency's official gazette Monday, Ecuador and Venezuela are proposing production output quotas for OPEC member countries. Although countries like Saudi Arabia have sufficient financial reserves, accumulated wealth, and policy flexibility to manage the weak price environment, many of the non-traditional suppliers will be knocked out by lower prices.

Stocks to Watch on Weakness

Although we expect the oil price environment to be lower for longer, there are many energy stocks that look attractive on weakness. Three stocks on our radar include: Tesoro Logistics LP (TLLP) is one of our favorite stocks at current levels following a recent 11% pullback. TLLP's low-risk asset base, coupled with a supportive sponsor, provides the company with one of the most compelling growth stories in the MLP industry. TLLP has a stable and visible base cash flow profile, strong support from its sponsor, Tesoro Corporation (TSO), a strong balance sheet, and ample liquidity to capitalize on growth opportunities.

Baker Hughes Incorporated (BHI) remains a favorite based on our bullish long-term outlook for North America's energy services market, coupled with a recent market downturn and favorable acquisition price. Last November, Halliburton Company (HAL) agreed to acquire BHI for $34.6 billion. Each BHI shareholder is set to receive 1.12 shares of HAL and $19 in cash per share if the deal closes. Should the deal not close, HAL must pay BHI $3.5 billion or $8 per share, giving BHI shareholders some additional protection.

Concho Resources, Inc. (CXO) is one of our favorite energy stocks because the company owns some of the best oil producing land in the United States. CXO is also well positioned for another beat-and-raise performance during 2016. Over the last several years, CXO has been able to beat production and cost expectations on a consistent basis. We do not expect this theme to end during 2016. In fact, we believe that CXO will highlight its best-in-class operational capabilities. During the last three months, CXO has fallen more than 23% and we think shares are undervalued at current levels.

Michael Berger, Founder and President,

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