What you need to know before Opec's conclave

Global oil inventories, while high, would decline since Chinese, Indian and Japanese demand growth will accelerate.

The 11 per cent fall in the price of crude oil in the past month on panic selling in the energy futures pits of New York, London and Singapore has unnerved the world's leading oil and gas exporters. Saudi Arabia will both extend last November's Opec output deal beyond and 2017 and even coordinate fresh output cuts with Russia, Iraq, Iran and Algeria. The Kremlin and even the Chinese premier have voiced support for "stability" in the oil market, code for the $50-$60 Brent range Saudi Arabia is doing its best to engineer.
The kingdom, with vast fiscal and national security spending, needs a $50-$60 range to assure the success of the planned Saudi Aramco IPO. Putin cannot afford another oil price crash at a time when the Russian economy is still in recession and anti-regime protests have broken out in Moscow and Petrograd. China has even agreed to buy Russian crude oil for its own Strategic Petroleum Reserve. A Saudi-Russian-Chinese tacit pact on oil prices means we could have seen a short term bottom once again in the $48 Brent crude level. In the run-up to May 25 Opec meeting in Vienna, the balance of risks finally once again favours the wounded oil bulls. This is Saudi Arabia's "whatever it takes" moment.
True, US shale output will grow by at least 600,000 barrels a year and the US is producing 9.2 million barrels even now. Global inventories, while high, will decline since Chinese, Indian and Japanese demand growth will accelerate while the US economy exhibits zero recession risk. My favourite integrated oil major pick in the US is Occidental Petroleum, which owns fabulous acreage in the Permian Basin, offers a 5.10 per cent dividend at $60 and has serious potential to increase its cash flow yield. Oxy could even divest its chemicals or GCC businesses and thus raise its current modest valuation to a pure-play low-cost, long-life reserves Permian Basin operator ranges near 12-13 times earnings. Oxy is the most crude oil price sensitive stock in Big Oil. Its six to eight per cent output growth plus a five per cent dividend yield make it a no-brainer since even at $50 Brent the net asset value is at least $64.
Pioneer National Resources is America's most exciting shale oil exploration and production firm, with the potential to grow output by at least 20 per cent a year. Pioneer has the acreage and financing to increase output to one million oil equivalent barrels per day in the next five years. Even if oil prices average at $50 a barrel and natural gas $3, Pioneer can achieve 15-18 per cent cash flow growth. I was not around in this world when Sir Henry Deterding built Shell in the 1920s, or Dr Armand Hammer when he built Oxy in the 1950s, but I plan to be around for the ride as an epic wildcatting management team builds the world's next shale BP in the Midland Basin. If Pioneer falls to 150, I view it as the energy growth star of the year.
I had recommended French oil major Total as my favourite Seven Sister global oil major at ?42 with a target at 48-50, which was achieved. The latest crash in Brent has led to a correction in Total despite the seven per cent rise in the French stock market on hopes of a Macron win. Total has slashed its cost structure and capex budget, leading to a surge in free cash flow that enabled management to raise its cash dividend to ?2.45 and the dividend yield is now a stellar 5.3 per cent.
Incredibly, Total, once the Quai d'Orsay's oil and gas play on the fabled Françafrique, (Plus Angola, a former Portuguese, Soviet and Cuban colony!), has reduced its breakeven Brent price to $40. Total has also used the oil price crash to accumulate valuable LNG concessions and new oilfields/gas fields in Brazil, the Ivory Coast and Uganda.
Chevron has better output growth prospects than its archrival Exxon Mobil but its rise in upstream EPS growth will be offset by margin compression in the refining/marketing downstream market. Chevron's low balance sheet leverage and 20 per cent net debt to market cap makes total sense at a time of Fed rate hikes. Chevron offers a 4.2 per cent dividend yield at my preferred entry level of 104. Chevron shares would become even more compelling below 96-98 even though I doubt this will happen if Saudi Arabia/Russia seal another Opec and non Opec pact on May 25 in Vienna.