Oil prices are climbing due to increasing geopolitical tensions in the Middle East. Recent events, such as Israeli strikes on Iranian-linked targets in Syria, have raised fears of major disruptions to the global oil supply. This instability has heightened concerns about oil production in the region.
As a result, crude oil prices have surged. The Organization of the Petroleum Exporting Countries (OPEC+) has also played a role by enforcing production cuts to support these price increases.
Given the ongoing conflicts and OPEC+’s strategy to limit production, oil prices are expected to remain high throughout 2024. Supply issues, along with uncertainty in the Middle East, are prompting more exploration and production (E&P) activities in stable regions, especially in U.S. shale reserves. This increase in exploration is likely to lead to more drilling rigs in operation and, ultimately, a rise in oil production.
Upstream oil companies are in a strong position to benefit from these market conditions. Higher oil prices typically lead to better profit margins for businesses involved in extracting and producing crude oil. Consequently, investors are focusing on companies with solid fundamentals that can efficiently increase production. Stocks of firms specializing in E&P, particularly those with significant oil reserves and operational flexibility, are likely to attract investor interest.
Key Beneficiaries: ConocoPhillips, Occidental Petroleum, and Epsilon Energy
ConocoPhillips (COP) stands to gain significantly from the current oil price rally. The company has a broad asset portfolio in important oil-producing areas, including Alaska, the Lower 48 states, and Canada.
In Alaska, ConocoPhillips operates major fields like Prudhoe Bay and Kuparuk, contributing 173 thousand barrels per day (MBD) of crude oil in 2023. In U.S. shale basins like Delaware, Eagle Ford, and Bakken, it produced a total of 569 MBD last year. The company’s acquisition of the remaining stake in the Surmont oil sands project in Canada strengthens its market position, ensuring steady output and cost-effective production.
Occidental Petroleum (OXY) is another key player poised to thrive in this favorable market. The company has a strong presence in the Permian Basin, utilizing advanced oil recovery techniques and extensive infrastructure to boost production efficiency.
In 2023, Occidental produced 584 thousand barrels of oil equivalent per day in the Permian, benefiting from its expertise in CO2 recovery methods. Its operations in the Gulf of Mexico and international projects in Oman, the UAE, and Algeria provide diversification, helping the company manage risks while maintaining solid production levels.
Epsilon Energy (EPSN) is a smaller but expanding player in the Permian Basin. It has recently grown its presence through acquisitions and new well completions in Texas and New Mexico. The company is shifting towards liquid-rich production, which offers higher profit margins compared to its natural gas operations in the Marcellus Shale.
With realized oil prices of $78.71 per barrel in 2023 and new wells coming online, Epsilon is positioned for increased profitability as oil prices remain strong. Its recent acquisition of undeveloped land in Texas sets the stage for growth in this favorable pricing environment.
As oil prices continue to rise, these companies are well-equipped to take advantage of the current bullish market, presenting appealing opportunities for investors.
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