Oil prices crashed big time in the final quarter of 2018, with the West Texas Intermediate (WTI) index declining from a high of $76 per barrel in October last year to around $42 per barrel in December. But prices have gained some ground of late, rising to more than $56 a barrel as of this writing thanks to supply chain actions by key producers and a potential trade deal between the U.S. and China.
Of course, uncertainty about the direction oil prices might take going forward still looms. But there are a few oil producers who believe that they can flourish even in a weak pricing environment. More importantly, the three oil companies we are going to talk about in this piece can deliver impressive growth in free cash flow if oil prices sustain their current levels and perform even better if they move higher. Let’s take a closer look at each of them.
SRC Energy
SRC Energy [stock_market_widget type="inline" template="generic" color="default" assets="SRCI" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] might have taken a massive beating on the stock market over the past year, but a closer look at its operational profile indicates that the company is making the right calls to grow business. For instance, SRC’s 2018 production had increased 48% over 2017 levels. The company took advantage of strong oil prices prevalent throughout the year and managed to increase its revenue by 78% last year, clocking a figure of $645 million.
This combination of substantially higher production and better pricing allowed SRC to increase its net income by 82% last year to $260 million. Now, it is clear that SRC can really perform when oil prices stay strong, but at the same time, it has the ability to hold its ground in case things go south. That’s because SRC is capable of reducing its capital outlay by a substantial margin but still achieve production growth in a depressed oil pricing scenario.
This is evident from the fact that the company’s capital expenses this year will fall to a range of $425 million to $450 million as compared to $583 million in 2018. At the mid-point of that guidance range, SRC’s capital expense is slated to decline around 25%. However, this won’t impact production, which is expected to increase by 19% in 2019 to a range of 59,000-62,000 barrels of oil equivalent per day.
Given that the company’s 2019 capital expenditure budget has been planned at a $50 WTI oil price, it won’t be surprising if it decides to boost its outlay and produce more oil. In that case, SRC can easily outpace expectations and take advantage of further improvements in oil prices.
TORC Oil and Gas
Like SRC, TORC Oil and Gas [stock_market_widget type="inline" template="generic" color="default" assets="TOG.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is also capable of boosting production in difficult circumstances thanks to the efficiency of its assets. After increasing its oil production by 21% in 2018 to 25,339 barrels of oil equivalent per day, TORC plans to maintain an annual average production level of 28,000 BOE per day this year.
That represents an increase of around 10% over last year’s levels, which will be achieved at a CapEx of C$180 million, just under a 10% increase as compared to last year’s outlay of C$165 million. Moreover, the company is planning to boost its outlay if the oil pricing environment keeps improving.
Bears might argue that TORC’s production growth isn’t that impressive and it could be wiped out by weak prices. However, last year, higher average prices allowed the company to increase its revenue big time due to higher production. While TORC may not be able to climb to those highs again in a depressed oil pricing environment, investors shouldn’t forget that it can step on the gas if things start improving.
And, even if there aren’t any oil price improvements, the company will be able to maintain production growth despite limiting its expenses. This makes TORC a good oil price turnaround bet.
HighPoint Resources
Like many other oil producers, HighPoint Resources [stock_market_widget type="inline" template="generic" color="default" assets="HPR" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has been a victim of weak oil prices, as the market has failed to appreciate the company’s solid performance given the negativity prevalent in the industry. The company has been clocking impressive oil production growth rates that it plans to maintain this year as well.
HighPoint’s annual average production for 2018 was 27,866 barrels of oil equivalent per day, a jump of 45% as compared to the preceding year. More importantly, High Point believes that it can increase its production by 25% in 2019. That might sound like a reduction compared to last year’s performance, but it is really impressive if we consider that High Point’s planned capital expenditure of $350 million-$380 million for this year is well below last year’s $509 million outlay.
Additionally, the company believes that it can deliver higher production this year while reducing its drilling and completion expenses by 10%. Moreover, High Point’s 2019 capital outlay has been designed assuming a $50 WTI oil price. So further improvement in this pricing level will encourage HighPoint to increase production and potentially generate stronger cash flow levels.
Conclusion
There are a few gems in the oil industry that investors shouldn’t miss. The likes of SRC, HighPoint, and TORC are capable of holding their ground even in a low oil pricing scenario and step on the gas once the bad times end. They are definitely some of the oil stocks you need to keep on your radar if you want to take advantage of a potential oil price recovery.
