If you are interested in energy investing, you’re probably aware of how volatile the oil market can be. When OPEC first decided to reduce excess inventory, the oil market was expected to have a turnaround, but this has not been the case. As of right now, crude oil prices are down double digits since the start of 2017. Why? You can blame the United States shale producers for that one as a number of them have been increasing investment spending, which caused a cascade of new production that is working against OPEC’S end-goals.
The downtrend in the oil market has caused ConocoPhillips (NYSE:$COP) stock to drop 8.5% so far this year. That said, there are a few reasons that investors remain optimistic that this multinational energy corporation will counteract the trend. Right now, there are three potential catalysts which could fuel a second-half rally in the stock.
Look at the data
Due to the upsurge of U.S. production, crude oil has revisited its 2017 low of $45 per barrel. This is where it sat before OPEC announced an agreement which would support the oil market in November of 2016. This drop came regardless of the fact that the oil market is slowly getting better with each passing day. For instance, according to the latest data from the IEA, global oil supplies dropped 140,000 bpd in April. The IEA suggests that this caused global stockpiles to drop, while demand continues to rise. As a matter of fact, the IEA predicts that oil demand will increase by 1.3 million barrels per day in 2017 and non-OPEC supplies are thought to rise 6000,000 barrels per day. It’s important to note that OPEC’s output is down by half a million barrels from 2016, which caused the global oil market to be undersupplied, thus helping to reduce excess inventory.
If this trend continues on the path that it is on, oil prices should start to rise, especially following OPEC’s decision to renew its output cuts for an additional nine months. If oil prices start heading higher, ConocoPhillips stock could start to move up the ladder as well.
Buybacks make a difference
Unlike the majority of its competitors, ConocoPhillips has no desire to increase spending and chase after production growth. The Texas-based company would much rather focus its capital on developing value for investors, which includes buying back stock, improving their balance sheet, and paying a higher dividend. This plan is carried out through selling non-core assets.
ConocoPhillips already sold a number of assets in 2017, such as their transaction with Cenovus Energy (NYSE:$CVE). Overall, these deals have amassed $13.3 billion in cash, 208 million shares of Cenovus Energy stock, and contingency payments which are based on future oil prices and gas prices. As of right now, the Texas-based company plans to use their initial cash payment as a way of reducing debt, and buying back $6 billion in stock over the coming three years, which includes $3 billion in 2017. The 2017 buyback could provide an increase to the share price since it represents 5% of ConocoPhillips outstanding shares at the present market price.
ConocoPhillips is (finally) gaining profit
Following a number of losses during the oil market decline, market experts believed that ConocoPhillips would get “back into the black”, but sadly, the Texas company disclosed another loss of $19 million ($0.02 per share). Additionally, the company modified these results and reported an even bigger loss a few days later. This occurred after Anadarko Petroleum (NYSE:$APC) reported its decision to write down its carrying value in the project. Following in Anadarko’s footsteps, ConocoPhillips reported an adjusted loss of roughly $200 million ($0.14 per share) for the quarter.
Regardless, there are experts who believe that ConocoPhillips is on the verge of returning to profitability. This can be seen in their consensus estimate for Q2 as they have predicted that the company will disclose a profit of $0.02 per share. Essentially if ConocoPhillips can head back into the black, this will be the catalyst that the stock needs to turn around.
The Takeaway
Despite ConocoPhillips stock struggling to obtain traction in the first half of 2017, there are a number of catalysts on the rise which could get COP out of its slump. For example, a turnaround in the market could allow for the stock to rally, seeing as the company is correlated to oil prices. Additionally, the effect from COP’s buyback could help the stock move higher in the second half of 2017.
Featured Image: Oilandgaspeople.com
