The price action has been nothing short of breathtaking, with oil soaring $55 a barrel this year. It rose more than 7% on Thursday alone after peace talks in Ukraine stalled and billionaire Warren Buffett increased his stake in a major US oil company.
On the morning of March 17, West Texas crude for April delivery of CL.1 +0.40% rose 7.2% to $101.90 a barrel. This is 22% less than this year’s WTI intraday peak price of $130.50 on March 7, based on continuous CL00 contract data one month ahead, +0.40%, compiled by FactSet. But it is up 35% from $75.21 at the end of 2021.
In order not to get too excited about today’s action, let’s look at an approximate price of $75 per barrel of oil. On Feb. 28, Sam Peters, portfolio manager at ClearBridge Investments in New York, said that if oil prices stabilize in the $75 to $80 range, “you will have very high free cash flows in most of the US. energy companies. You can read more of his comments here.
Below is a list of oil producers with the highest expected free cash flow returns. This can serve as a starting point for your own research. The list includes Occidental Petroleum Corp. OXY, +9.47%, recently revealed by BRK.B Berkshire Hathaway Inc., +2.64% Buffett. Occidental stock is up 85% this year.
To read: Berkshire Hathaway shares hit record highs. Buffett can thank Occidental, not Apple.
Supply-demand imbalance bodes well for oil reserves
Peters didn’t necessarily pay attention to the turmoil in global energy markets caused by Russia’s invasion of Ukraine. He considered the possibility of a radical reduction in the capital investments of oil producers in a period of growing demand.
This chart shows the energy industry’s estimated capital spending on exploration, development, and production of oil compared to U.S. inventory levels from 2004 to 2021:
The chart on the left shows that capital expenditures increased when supplies were low. The right side of the chart shows the incredible decline in capital costs as inventories began to dwindle.
Here is the ideal scenario for a healthy supply and demand environment for oil producers and their shareholders over the next few years, even when peace returns to Europe.
Oil screen – two magic words
The magic words are “cash flow”. Specifically, a company’s free cash flow is the remaining cash flow after capital expenditures. If we take the estimated free cash flow per share and divide it by the share price, we get the estimated free cash flow return. The higher the better.
In his comments on free cash flow, Peters stressed that boards of directors — and powerful shareholders — of oil companies are embarrassed to invest in the exploration and development of new wells of various types because they burned so badly during delivery. driven by price cuts that began in 2014 and a fall in demand at the onset of the coronavirus pandemic in early 2020.
Add to these factors the Biden administration’s general hostility to domestic oil production, and US producers can still be expected to be hesitant about investment.
And all of this means higher free cash flow that can be spent on regular dividends, special dividends, and share buybacks, which can benefit investors and drive up share prices.
To test oil-related stocks, we started by owning two ETFs:
iShares Global Energy ETF IXC, +2.91%, including all 21 stocks in the S&P 500 energy sector, itself tracked by the Energy Select Sector SPDR ETF XLE, +3.44%.
iShares S&P/TSX Capped Energy Index ETF XEG, +3.72%, which includes shares of 20 Canadian energy producers and is dominated by Canadian Natural Resources Ltd. CNQ, +4.78% CNQ, +5.26%, accounting for 27% of the portfolio, and Suncor Energy Inc, SU, +3.58% SU, +4.18%, which weighs 24%. A stable period in oil prices means more chances for continued profitability for Canadian oil sands producers.
Combined with the duplicates removed, the two ETFs own 65 shares, and consistent free cash flow estimates are available for 64 companies, according to analysts polled by FactSet.
Here are 17 companies with an estimated 2022 FCF return of more than 20%, based on stock prices as of the end of the day on March 16. Share prices and free cash flow estimates are quoted in the local currency where the shares are listed:
| Company | Ticker | The country | Estimated FCF return for 2022 | Dividend yield |
APA Corporation. | APA, +7.00% | US | 31.85% | 1.36% |
Vermilion Energy Inc. | VET-CA | Canada | 29.97% | 0.95% |
Crescent Point Energy Corp. | Consumer goods, +4.00% | Canada | 29.67% | 2.12% |
Peyto Exploration & Development Corp. | PAY, +3.32% | Canada | 29.06% | 5.70% |
MEG Energy Corp. | MEG, +5.63% | Canada | 27.37% | 0.00% |
Birchcliff Energy Ltd. | BIR, +5.77% | Canada | 27.31% | 0.61% |
Petroleo Brasileiro SA ADR Pfd. | PBR.A-USA | Brazil | 26.47% | 16.25% |
Bytex Energy Corp. | BTE, +2.40% | Canada | 25.88% | 0.00% |
Petroleo Brasileiro SA ADR | PBR, -1.81% | Brazil | 24.17% | 14.84% |
Tamarack Valley Energy Ltd. | TPO, +5.01% | Canada | 23.71% | 2.00% |
EnerPlus company. | ERF, +3.35% | Canada | 22.44% | 1.04% |
Equinor ASA | EQNR, +3.62% | Norway | 21.47% | 2.20% |
ARK Resource Ltd. | ARX, +3.69% | Canada | 21.27% | 2.74% |
ConocoPhillips | Efficiency, +4.23% | US | 21.22% | 1.94% |
OMF AG | OMV, -1.70% | Austria | 20.89% | 5.45% |
LLC “Imperial Oil” | IMO, +1.67% | Canada | 20.81% | 2.55% |
Occidental Petroleum Corp. | OKSI, +9.47% | US | 20.55% | 0.98% |
Source: Factset | ||||
While not all of the companies on the list can be considered playing regular dividends, we have included dividend yields to show how much “headroom” companies have to capitalize on free cash flow through higher regular dividends, special dividends, or share buybacks.
A single data point should not be the basis for an investment decision. You should do your own thorough research when making investment decisions.
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