U.S. / China Trade Deal - Jan 16

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The U.S. and China agreed to Phase One of a trade deal that should result in higher demand for oil.

Comments below are from Zacks Equity Research Team. Three of their top picks are in our Sweet 16.

The trade deal should help prop up the demand outlook for oil while OPEC’s deeper supply cuts are likely to push the market back into supply deficit. Moreover, the growth rate of U.S. shale oil production is set to slacken substantially in 2020 on reduced capital availability. Finally, greater financial discipline practiced by the energy companies have raised expectations that supply growth could slow down sooner than later.

Concho Resources Inc. (CXO): Concho Resources focuses on growth through a combination of acquisitions and active drilling in the lucrative Permian Basin spread over west Texas and New Mexico.The Midland, TX-based company has an expected earnings growth of 47.4% for this year.

EOG Resources, Inc. (EOG): EOG Resources’ operations are spread across the United States, China and Trinidad. Over 30 days, the Houston, TX-headquartered company has seen the Zacks Consensus Estimate for 2020 increase 3.2%.

Pioneer Natural Resources Company (PXD): Pioneer Natural Resources is an independent oil and gas explorer with producing properties mainly in the Permian Basin. The Irving, TX-based company has an expected earnings growth of 15.3% for this year.

Let’s take a look at the industry’s three major themes that companies with strong oil production attractive:


Oil prices posted 34.5% rise last year - the biggest annual increase since 2016. In particular, WTI, the U.S. benchmark, jumped nearly 11% in December, aided in part by the agreement on a phase one trade deal between the United States and China. The development – coming after months of wrangling – was seen to prop up the oil demand outlook on the back of revival in global economic growth. The recent ‘formal signing’ of the agreement is set to further strengthen the oil consumption levels as Beijing has pledged to purchase a massive $50 billion in American energy products over the next two years. Also boosting oil, the OPEC+ group is cutting output by as much as 500,000 barrels per day from Jan 1 for three months.

Meanwhile, no major commodity had a worse 2019 than natural gas. The fuel endured a torrid year, registering its worst annual decline since 2014. Prices tumbled more than 25% last year, falling to multi-year lows of around $2.1 per MMBtu in between, as buyers fled the market over growing worries about record output and concerns of an ongoing supply glut. With output from shale formations swamping the market, there is little room for prices to improve meaningfully from their current levels of around $2.2 per MMBtu. Operators in oil-dominated shale basins like the Permian, Eagle Ford and North Dakota are also struggling with significant natural gas flaring - a largely unwanted derivative that emerges alongside crude production in the region.

Over the past few years, energy producers worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service producers. Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs and live within their cash flows. All of these factors, together with production growth and capital discipline have resulted in healthy free cash flows. With cash generation expected to remain robust even at relatively low oil prices, there is strong potential for greater return of capital to shareholders through dividend growth and stock buybacks.