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Shale Oil Stocks Transformed Global Markets — But Can They Transform Themselves?

U.S. shale oil stocks are no strangers to reinventing themselves. But their next act may have to be the boldest yet as climate change forces tough choices for companies like EOG Resources (EOG), Continental Resources (CLR), Diamondback Energy (FANG) and Devon Energy (DVN).




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Independent shale producers began as wildcatters with a “drill baby drill” mindset, making riskier bets that giant oil companies like Exxon Mobil (XOM) ignored. They unlocked vast amounts of oil that reduced U.S. dependence on foreign supplies. Then they developed new technologies that cut costs, allowing them to challenge the Organization of the Petroleum Exporting Countries.

Now they’re more mature, with a measured approach to drilling. And after soaring more than 500% from the early days of the shale boom, top shale stocks like EOG and Pioneer Natural Resources (PXD) are focusing on their balance sheets and paying dividends to shareholders.

For their next iteration, U.S. shale oil stocks must find a way to survive in a future with governments, activist investors and consumers pushing for companies to reduce emissions. Meanwhile, the costs for competing energy sources — solar, wind and EV batteries — keep coming down.

“If you’re just in the horse and buggy business, and the world is moving to internal combustion engines, you’ve got a problem and you have to deal with it,” said Danielle Fugere, president of activist shareholder group As You Sow. “Climate change is existential for humanity and for the globe and the environment. And the response will be existential for oil and gas companies.”

A new generation of activist investors are finding ways to change the oil industry. As You Sow pushed for Chevron (CVX) to be transparent about the impact climate change policies will have on its business in the future. And Engine No. 1 gained three seats on Exxon’s board to push for a more proactive approach to climate change. Other oil majors are taking even more dramatic steps.

Where does that leave shale oil stocks?

“There will be less capital for companies that aren’t on a net-zero pathway,” Fugere warned.


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Rebounding Economy Lifts Shale Oil Stocks

For now, oil shale stocks are enjoying the fruits of the global economy’s rebound from the pandemic. Even after the recent sell-off, oil prices are nearly 70% above year-ago levels.

And the Oil & Gas-U.S. Exploration & Production industry remains No. 1 out of the 197 industries that IBD tracks based on six-month stock price performance.

Shares of leading shale stocks like EOG and Continental Resources are up 48% and 112%, respectively, so far this year through Thursday.

Even the highly contagious Covid-19 delta variant isn’t slowing down the recovery in airline traffic, a major driver of fuel demand.

Forecasts from the International Energy Agency, U.S. Energy Department and OPEC predict oil producers must pump an additional 4 million to 5 million barrels per day by next year to meet rising demand.

But the long-term picture for shale oil stocks is gloomier.

Mining heavyweight BHP (BHP) is considering options for its oil-and-gas business that include a trade sale, sources told Bloomberg. BHP wants to avoid getting stuck with assets that may become difficult to sell as countries and companies shift away from fossil fuels.


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Threats To Shale Oil Stocks

Even without investor activism, shale stocks face pressure from industry.

Tesla (TSLA) made electric cars trendy. And today’s drivers have nearly 400 different electric vehicles to choose from. That number is only set to grow as auto industry bellwethers General Motors (GM) and Volkswagen (VWAGY) phase out internal combustion engines by the next decade. China and the European Union also look to phase them out by the 2030s.

(Grzegorz Czapski/Shutterstock.com)

The long-term outlook for natural gas, another key product from shale oil companies, isn’t looking so hot either. Some cities have banned natural gas heating and appliances in new homes. The IEA sees natgas demand peaking in the mid-2020s.

As consumers shift away from gasoline on the road, utilities are going greener too. Historically a major end market for natural gas, utilities are generating more electricity now from solar and wind power.

Banks, once an enabler of shale’s blockbuster growth, are under pressure from investors to avoid financing high-carbon industries. Goldman Sachs (GS), JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and Morgan Stanley (MS) have said they won’t lend to Arctic drillers.

And private equity firms raised $52.2 billion for renewable-energy funds last year, six times more money than for conventional-energy funds. So far this year, renewables ($29.9 billion) outpace conventional energy by 25 times.

“To some extent, they will be subject to the market forces that occur,” Fugere said about shale oil stocks. “As demand falls, they will have to make some fundamentally difficult decisions.”


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The Response From Producers

Shale producers are mindful of the pressures and vow to reduce emissions. However, there are narrower and broader ways to be “net zero” when measured across three categories.

Scope 1 includes emissions that come directly from a company, such as its equipment and burning off excess natgas from wells. Scope 2 covers indirect emissions like those from the generation of electricity that a company consumes. Scope 3 is the most impactful as it includes emissions that come from consumers burning the fossil-fuel products that shale companies supply.

The holy grail of clean energy is net-zero emissions from all three scopes. But some top shale oil stocks are not so holy.

Diamondback Energy (FANG) pledged in February to immediately become net zero with its Scope 1 emissions. In June, Devon Energy (DVN) vowed to cut emissions by 50% by 2030 and be net zero in Scopes 1 and 2 by 2050.

But they stopped short of Scope 3. In fact, Devon COO Clay Gaspar said there is no “clear path” to reducing Scope 3. “My most direct means of reducing Scope 3 emissions is reducing our primary products — oil, gas and natural gas liquids — which there’s still a fundamental demand around the globe for,” he told Argus Media.

Other shale oil stocks are more ambitious. Occidental Petroleum (OXY), which has become a top Permian Basin producer, announced in November it would be net zero in Scopes 1 and 2 by 2040 as well as in Scope 3 by 2050.

And oilfield service giant Schlumberger (SLB) announced plans with Panasonic Energy to produce lithium, a key component of electric-vehicle batteries.


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No Easy Pivot For Shale Oil Stocks

But shale companies, nimble in developing new technology for oil and gas, will have a harder time pivoting to a new business.

They could produce hydrogen needed for fuel cells, says Mark Viviano at private equity firm Kimmeridge. But he says it’s unlikely the hydrogen produced would be “green.” Instead, it would be “gray” or “blue” hydrogen, which still gives off carbon emissions in its production.

Even oil giant Chevron isn’t turning away from oil and gas. At Reuters’ Global Energy Transition conference in June, the company said it’s not planning to be a major player in wind or solar energy and that it won’t shrink its oil and natgas business.

Shale oil stocks may just end up staying the course.

“As long as there is a barrel being demanded, they will be producing,” Cowen analyst David Deckelbaum said. “So, it’s just a matter of becoming a low-cost producer, and returning excess capital to the shareholders over time.”


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Growth Prospects For Shale Stocks

But that is not to say that shale oil stocks will escape change.

In an April report by Wood Mackenzie, the energy consultancy group estimates that Brent oil prices could fall to $40 per barrel by 2030 and $10 by 2050 if the “world acts decisively to limit global warming to 2 degrees Celsius by 2050” as outlined in the Paris Climate Agreement.

If oil prices drop that much, only the leanest and most technologically advanced independent producers will survive. And the number of shale producers would shrink amid a wave of consolidation.

“You would probably have less than a dozen sometime in the next decade,” Deckelbaum said. “But the industry would look relatively similar to the way that it does today, just a very, very low growth model with a very low breakeven cost on the price of oil.”

Top Shale Oil Stocks Now

IBD’s U.S. exploration and production industry group includes 59 stocks, such as EOG and Continental Resources. However, they are not the top-rated stocks, based on CAN SLIM metrics like Composite Rating and Relative Strength.

Other major players with U.S. shale and overseas operations, such as Occidental and ConocoPhillips, are in a separate industry group: Oil & Gas-International Exploration & Production.

Global giants with upstream and downstream businesses like Exxon are in the Oil & Gas-Integrated industry group. Here are the top five U.S. exploration and production stocks, ranked by Composite Rating.

Company Symbol Composite Rating Relative Strength Rating EPS Rating YTD Gain
Denbury DEN 98 98 97 149%
Diamondback Energy FANG 95 93 77 62.5%
Callon Petroleum CPE 94 99 71 222%
Matador Resources MTDR 92 98 77 163%
Bonanza Creek Energy BCEI 92 93 80 95.6%

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