Saudi Arabia and Russia, among others, plan to limit their production until at least March, 2018. This has raised oil prices and the loonie. It should increase the profits of oil and gas stocks Cenovus Energy, Encana, Imperial Oil and Suncor Energy. All four remains buys.
Saudi Arabia and Russia are the world’s two largest exporters of oil. Both countries’ fortunes are closely linked to oil prices. That’s why they’re limiting their production in order to raise the price of oil.
Saudi Arabia and Russia pledged to extend their past production cuts until at least March, 2018. Other producers, including Iran, Iraq, Kuwait and Venezuela support cuts by OPEC (Organization of Petroleum Exporting Countries) and non-OPEC countries.
The plan is to bring down global oil inventories to their five-year average. The extension of the production cuts raised optimism about oil prices. On the day of the announcement, West Texas Intermediate—North America’s benchmark oil price—rose by US$1.46, to $49.30 a barrel. Western Canadian Select—what oil sands’ production will fetch—rose to $39.60 a barrel.
Oil producer stocks and the loonie stand to rise
Higher oil prices will raise the profitability of Canadian producers—including oil and gas stocks Cenovus Energy (TSX—CVE; NYSE—CVE), Encana Corp. (TSX—ECA; NYSE—ECA), Imperial Oil (TSX—IMO; NYSEMKT—IMO) and Suncor Energy (TSX—SU; NYSE—SU). Higher profits, in turn, should increase their share prices. Higher oil prices are also likely to lift the Canadian dollar’s exchange rate.
The thing is, American shale oil producers have clipped the influence of OPEC. That’s because shale oil production becomes more profitable as oil prices rise. Since mid-2016, for instance, U.S. oil production has climbed by more than 10 per cent—according to New York City-based investment banking firm Goldman Sachs.
To the extent that OPEC and non-OPEC producers succeed in raising prices, others will take away their market share. American shale oil producers can ramp up and ramp down their production very quickly, in response to changing prices. As technology continues to improve, their break-even points (the oil price at which the shale producers become profitable) is likely to keep on falling. The U.S. now has much less need for oil from the Middle East.
Non-OPEC countries such as Canada, Norway, Britain and Australia will raise production as prices rise. They, too, will take away market share from OPEC and its allies. In short, the cartel members are in a bind. If they let the price of oil fall, they suffer economically. If they raise prices, others fill the void.
Cenovus Energy, Encana Corp. and Imperial Oil are expected to earn more money in 2017 and 2018. We expect Imperial Oil to continue to raise its dividend. Suncor Energy is expected to earn more in 2017 and then only two pennies a share less in 2018. We expect Suncor to keep raising its dividend. All four remain buys for long-term share price gains and dividends. Buy Imperial Oil and Suncor Energy for growing dividends.
This is an edited version of an article that was originally published for subscribers in the May 26, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •6/7/17 •