Energy
Thursday, September 15th, 2022 4:49 am EDT
U.S. oil prices have been sliding in fits and starts since June, but the Biden administration may be ready to flip from being a seller to a buyer of crude to replenish the nation’s Strategic Petroleum Reserve . The SPR, which has been releasing 1 million barrels per day of supply since March, has been depleted to levels not seen in nearly 38 years. When the government decides to start buying, oil prices could get some nice support, which would be good for our energy holdings. Speculation about the U.S. restocking its emergency oil supplies swirled this week around two bits of news. First, the U.S. Department of Energy said the SPR, with an authorized storage capacity of 714 million barrels, is down to 434.1 million barrels, reaching its lowest levels since October 1984. Second, unnamed Bloomberg sources said the White House is considering buying crude to refill the SPR around $80 per barrel, which could serve as kind of a floor in the market. When a player like the U.S. government goes from supplier to buyer, its a pretty positive sign for those that benefit from higher oil prices. Depending on the pace of purchases, the net effect would be to soak up over 1 million barrels per day from the global supply — the 1 million no longer being supplied plus whatever they buy to replenish the SPR. West Texas Intermediate crude on Thursday was around $88 per barrel. WTI was over $120 in June and over $130 in March after Russia invaded Ukraine. Hoping to put a cap on gasoline prices, the Biden administration in March agreed to release 180 million barrels of oil from the SPR over a six month period. Shortly after that announcement, international allies in early April committed a 60 million barrel emergency release program . Gas prices soared to record highs anyway to over $5 per gallon in June. But since then, prices at the pump have eased along with crude, which has helped offset inflationary pressures in other parts of the economy. When the U.S. decides to get its reserve capacity closer to where it was before Russia’s unprovoked war against Ukraine disrupted world energy supplies, that could lift oil prices, or at the very least stem the decline. That would be a potential catalyst for Club holdings Coterra Energy (CTRA), Devon Energy (DVN) and Pioneer Natural Resources (PXD), which have seen their stocks fluctuate with the up-and-down action in crude prices. Bottom line Higher WTI prices mean more free cash flow for our energy companies, which have breakeven ranges well below the $80 support level that the U.S. is said to be thinking about buying at. That leaves ample room for our energy stocks to keep generating high levels of cash and providing resilient dividends to shareholders. Remember, the variable part of the dividend payments that all three companies pay are tied directly to free cash flow generation. Coterra’s free cash flow breakeven is about $40 per barrel as of its second quarter results. In August , when reporting those results, the board announced a quarterly fixed-plus-variable dividend of 65 cents per share, up 8.3% from its prior level of 60 cents per share. That’s 8.1% on an annualized basis based on Wednesday’s closing price. Earlier this year, during its earnings call in February, management at Devon mentioned its breakeven levels are around $30 per barrel. Management said in August in its quarterly results that strong cash flow realized in the second quarter allowed management to announce a 22% raise to the company’s fixed-plus-variable dividend payout, to $1.55 per share. That’s 8.6% on an annualized basis. Pioneer cites its ability to keep its high dividends as one of the highest yields in the S & P 500 through its resilient free cash flows. It returned over 95% of its fiscal second-quarter free cash flow via dividends and buybacks. The increase to the company’s fixed-plus-variable dividend went to $8.57 per share . That’s 13.6% on an annualized basis. We keep energy holdings in our portfolio as a hedge against concerns of persistently high inflation, for their high dividends, durable free cash flow and for the sector’s outperformance of the broader market. Energy has been one of the best performing sectors this year with the S & P 500 Energy Sector Index up almost 50% year-to-date, far outpacing the S & P 500’s 17% fall for 2022 so far. Moreover, European natural gas shortages could also benefit U.S. energy companies for the remainder of 2022 and the foreseeable future. That’s something we recently wrote about when nat-gas prices were hitting record highs. Keep in mind, if the U.S. comes in and buys oil around the $80 level, it’s not a given that oil prices stay this high, especially in a recession scenario. Oil prices have gone well below their $80 levels in the past. In July 2021, U.S. oil prices fell below $70 after OPEC said it would increase output as Covid fears weighed on global demand. So, we still must protect our portfolio in the event of an oil price decline. That is why we’ve been strategic in selling some energy names into strength to book some profits and manage our energy exposure. Recently, we exited Chevron on Sept. 7 and pared back some of our Devon shares on Sept. 6. We are still bullish on these holdings throughout the rest of the year, but we have to stay true to our disciplined strategy of not being overexposed to any single stock or sector. (Jim Cramer’s Charitable Trust is long CTRA, DVN and PXD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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