On this week's episode of Industry Focus: Energy, host Nick Sciple and Motley Fool contributor Matt Dilallo check in on the state of the oil industry. Chevron (CVX 0.95%) acquired Anadarko Petroleum (APC +0.00%) in a massive deal, sending shares of Anadarko soaring. Matt and Nick explain what this deal does for Chevron, and why it's such a good move for the business. Next, an update on one of Matt's favorite companies -- Kinder Morgan (KMI 0.88%), which recently reported earnings, and continues to put up consistent performance. Then, the guys preview upcoming earnings from Exxon (XOM 1.63%), Hess (HES +0.00%), and ConocoPhillips (COP 0.74%) this quarter. Tune in to find out more!
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This video was recorded on April 18, 2019.
Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, April 18th, and we're talking Energy. I'm your host, Nick Sciple, and today I'm joined by Motley Fool contributor Matt Dilallo via Skype. How are you doing, Matt?
Matt Dilallo: I'm doing great! How are you?
Sciple: I'm doing great, Matt! Happy to have you on once again! We've got a great show planned today! We're going to talk about one of your favorite companies, that's Kinder Morgan, just reported earnings yesterday. We're going to preview upcoming earnings from some of our favorite oil companies. But first, Chevron announced a $33 billion mega-acquisition of Anadarko Petroleum last Friday. Matt, as we look back a week later, what's your reaction to that news?
Dilallo: My reaction's still pretty surprised. Chevron didn't need to do any deals, and yet here they are, shocking everybody with the sixth biggest oil deal in history. I was surprised by it. But the more I've looked into it, it's a really good deal for Chevron. It makes total sense. There's a lot of overlap. Plus, it adds some things to them. So I really like it, from that perspective.
Sciple: When you talk about the assets that Chevron's adding, how does this acquisition fit into their strategy, and how does that reshape their portfolio as they move forward as a business?
Dilallo: The big takeaway is, this really bulks them up in the Permian Basin. Anyone who's talked about oil the last couple of years, that's the big deal in energy these days. It's just loaded with oil and gas. It makes them one of, if not the biggest drillers, landowners, producers in that region. That was the big draw. However, it adds a couple of other shale plays. Anadarko is really big in what's called the D-J Basin which is in Colorado. It's not as well-known as some of the other ones but a lot of oil and gas there. And then they got some land in what's called the Powder River Basin, which is in Wyoming. It's an emerging play. Chesapeake Energy calls it the oil growth engine of the company. So it adds a lot of shale potentially, but also, Gulf of Mexico, there's a lot of overlap. Big boost for Chevron in the Gulf of Mexico.
The third one is LNG. Chevron has some LNG assets in Australia. They pick up Anadarko's project in Mozambique, which is a world-class play, a lot of gas there. They're able to leverage what they did in Australia to develop this place. A lot of interesting parts with this deal.
Sciple: Yeah. When you have one of these big major oil players like Chevron getting a deal like this, really exciting to see how things develop. Matt, is there any chance that we see some follow-on bids related to this deal? I saw some news out that Occidental Petroleum had a deal out where they'd bid $70 a share. This Chevron deal is about $65 a share. Do you think there's any chance we see some follow-on competing bids here? Or do you think this is a done deal?
Dilallo: I think this is a done deal. This does not make sense for Occidental Petroleum. I really don't know what they were into other than it'll boost some of the Permian, but they don't have anything in the Gulf of Mexico. They're not into LNG. So it really doesn't make as much sense strategically. However, a lot of the other pure-play Permians make a lot of sense for not only Occidental, but a company like Shell, which really needs some boosts in the Permian, Exxon, the Permian is huge for them. So I could see names like Continental Resources, Pioneer Natural Resources, Parsley Energy, there's just a huge list of independents out there that could easily be bought up by one of these major oil companies.
Sciple: Yeah, definitely something to continue to watch. In an industry like shale, that's been the wild west for a while, to see some consolidation and maturing of the industry, is something I'd like to see as an investor.
Matt, let's move on to talk a little bit about Kinder Morgan. They reported earnings yesterday. Before we dive into those, on our 2019 preview podcast, Matt, you named Kinder Morgan your favorite stock idea for 2019. Is it still your favorite stock idea after we got yesterday's earnings reports news in?
Dilallo: I can't complain about them. Kinder Morgan's one of those really steady companies. The reason I picked them as my top one is because they were so undervalued at the time. They're still undervalued, even though they're up 25% this year. It's really a value play there. They're about to make more money this year than they did in the peak in 2015 and yet their stock's still down like 50%. I really like that one.
Sciple: Awesome! Let's go through their earnings report. I'm going to go step by step. You posted an article on fool.com earlier this week, Four Things to Watch When Kinder Morgan Reports Its Q1 Results. We're just going to go through those things that you told us to watch on fool.com. We'll see what our earnings gave us there.
The first thing that you called out for us to watch is, you want to see if the results match the budget. In 2019 guidance, Kinder Morgan had anticipated they would generate $5 billion in cash flow. They expected to generate 27% of that in the first quarter. The numbers that we got out yesterday, how is Kinder Morgan doing there when it comes to meeting their guidance?
Dilallo: They were right on track with that. Their budget was 1.35 and $0.59 a share. They came out at 1.37 and $0.60 a share. So it was 10% overall, up from last year's first quarter. 7% on a per share basis due to some dilution. That keeps them right on track with their full-year budget, even though there's been some headwinds here and there. They did a settlement with some customers on some rates for some pipelines. That was a headwind. But then they had some positive, some oil prices. So net-net, they're basically right on track for the full year.
Sciple: You like to see that from a company like Kinder Morgan. Another thing a lot of investors are looking for out of Kinder Morgan is the dividend and returning cash to shareholders. The company repeatedly promised to increase its dividend 25% in 2019. They've been buying shares back. They had a $2 billion stock buyback program that they initiated previously. From what we saw in Q1, what have we seen when it comes to the dividend boost? Anything from the buyback point of view from Kinder Morgan?
Dilallo: They did fulfill that promise, 25% increase. Nice to be a shareholder and get that extra boost this year. They also reiterated the plans for another 25% increase next year. They did not buy back any stock during the quarter. However, on the conference call, founder Richard Kinder said they'll do that when it makes sense. They've got some other things going on with a lot of expansion projects. I'm not totally surprised that they didn't buy back shares. But that is something to keep in track.
Sciple: Yeah. A lot of expansion projects coming down the line. We'll talk about that in a second. The third thing you said to look out for their earnings this quarter was what's going on with Kinder Morgan Canada. Back in 2017, they IPO-ed Kinder Morgan Canada to fund the Trans Mountain Pipeline. However, they've since sold that pipeline back to Canada. What, if anything, have we heard about what Kinder Morgan is going to do with that Kinder Morgan Canada entity and what its future is for the business?
Dilallo: They're currently exploring strategic alternatives for that. From what they've said, their alternatives are, they could sell it outright to another company for cash, they could merge it with another company and do a share and cash merger type of deal. They could just leave it alone and let it just be a separate entity. Or they could take it private. They're still analyzing all their options. They thought that they would have a decision by the first quarter call. But it's just taking longer to analyze the options. It's a pretty complex thing. They do expect it to wrap up in the next couple of weeks. I would expect an announcement soon. My gut feeling is that they're going to sell it because it just seems like that's the direction that... they're not hinting that way, but it just makes sense to get rid of that now, one way or the other. It just doesn't have the growth that they're looking for elsewhere.
Sciple: Yeah, it seems it was really a tough break with the company. It seemed to be they had huge opportunities with this Trans Mountain Pipeline, and just politically, it didn't work out for them, they had to sell it back to the government. Still working through those issues. We'll have to watch and see how things happen.
The last thing we wanted to look for in this Q1 earnings, and probably the thing a lot of investors want to look for is, how is Kinder Morgan going to continue to expand its business? What did we see? I know they laid out a new Permian pipeline. What are we seeing from Kinder Morgan when it comes to new expansion deals and how they're going to grow the business moving forward?
Dilallo: They secured another $600 million in projects during the quarter. They had completed $200 million. That was a net add of $400 million. That's a good starting point. Their goal is to get between $2 billion and $3 billion a year in high return expansion projects. They're well on their way to that. As you mentioned, there's a lot of different things in the pipeline, so to speak. One of the highlights of the conference call was that they're working on a third gas pipeline in the Permian. There's a lot of interest behind that. What's interesting about that is, there's so many other companies trying to build a Permian gas pipeline. You've got Targa, NextEra Energy, they've proposed the Whistler pipeline. They basically proposed that right around the same time Kinder Morgan came out with the Permian Highway Pipeline. Kinder Morgan beat them to the punch with that one. It'll be interesting to see if they can stay ahead of rivals and get that third pipe out there.
Sciple: A lot of opportunities there in the Permian. An exploding region. For a company like Kinder Morgan, great opportunity to service those folks, bring that oil and natural gas off of the shale plays. LNG seems to be moving forward. A lot of opportunities there for Kinder Morgan.
Let's move on and talk, preview some oil companies. We're going to talk about Hess, Exxon and ConocoPhillips. First, I just want to talk about how oil prices have performed so far this year. Oil is up 32% in the first quarter, which was the best quarter in a decade. Low-cost producers like ConocoPhillips and others had really positioned themselves to be successful at $40 a barrel oil, and now we're pushing $60 a barrel. Are you expecting this surge in oil prices to trickle down to the bottom line for all these E&P players?
Dilallo: Absolutely! They're pretty much directly related. Oil prices go up, profits go up. And a lot of them, because oil prices plunged in the fourth quarter, they cut their spending this year to balance their budgets. In ConocoPhillips' case, it's like $40 a barrel. Others are in that $40-$50 range. So with oil at $60, they're generating a gusher of cash flow that they'll probably use to either buy back more stock or drill more wells. It'll be interesting to see what they end up doing. If they drill more wells, that could put pressure on oil prices. That's one of the big things to watch this quarter, is what they're doing with this money.
Sciple: Let's move on and talk about the companies that we want to take a look at their earnings, preview them. First off, let's talk about Hess. Hess, we've talked about this company in the past on the show. They've been allocating a lot of their capital to their two big plays -- the Bakken shale play as well as Guyana. They're partnering with Exxon. As we look at to Hess' first quarter results, what should investors be looking for from the company?
Dilallo: Hess has done a really good job of surprising analysts with stronger than expected profits. Analysts actually see them losing money this quarter. I think it's a penny less than what they earn in the fourth quarter. Oil prices have exploded. So I would expect them to beat the estimates again. That could boost their stock price, even though their stock has been crazy this year.
The other thing I would keep an eye on is what they're doing in the Bakken. They ramped up their drilling. They see production coming in between 130,000 and 135,000 barrels a day. That's up from 126,000 last quarter. I would anticipate that to be at the high end. If it's not, then that could cool down their stock.
Sciple: Something to watch. Hess, of a lot of these smaller, pure-play E&P folks, is one of the most interesting. Their assets -- we mentioned when we talked about them on the podcast before, really strong assets position in the Bakken and Guyana. We'll see how they play out. Definitely a company to continue watching.
Let's also talk about their partner in Guyana, which is ExxonMobil. One of the largest publicly traded oil companies in the world. Exxon has really been advocating a lot of cash to the Permian. They're one of the largest players there, a big part of their strategy they've laid out to double earnings and cash flow over the coming years. As we look out into Exxon's upcoming earnings results, what should investors be looking for from that company?
Dilallo: There's usually two things that are the calling card for ExxonMobil. The first one's production. They're so big, they have trouble growing production sometimes because oil and natural gas wells naturally decline. It's really hard to keep up with that decline rate, especially for companies like Exxon. They're around four million barrels per day last quarter. If they can keep that up or grow production, that'll be a good sign. They've struggled a lot in the past and that's weighed down their stock price.
The other thing is downstream, which is refining chemicals and those businesses. They benefit from lower oil prices, and it's a headwind when oil prices rise because they consume oil. What was a big boon for them in the fourth quarter could be a headwind in the first quarter because oil prices rose. So I would keep an eye on downstream earnings. I'm not as optimistic about Exxon reporting a good quarter as I am for a company like Hess or ConocoPhillips because of that downstream exposure.
Sciple: Right, the nature of being a fully integrated oil company. They have different exposure, rather than just oil prices go up, profits go up. It's a more complicated business.
Let's move on and talk about ConocoPhillips. Of the three we're going to preview earnings for, just because of the news we got this morning, is probably the most interesting one. As I mentioned this morning, ConocoPhillips announced a deal with Chrysaor Holdings to sell a package of North Sea oil assets for $2.68 billion. Matt, this news came out this morning, but instant reaction, what are your thoughts on this deal and what it means for ConocoPhillips moving forward?
Dilallo: Yeah, they've been selling non-core assets for several years. This one's been on the market for a while. They tried to sell it earlier this year, and that deal fell through. It's no surprise to see them eventually selling it. This is a higher-cost oil play out there in the North Sea, not as much growth. They're going to take that money and probably use it to buy back stock or maybe they'll even boost their drilling program this year. Their focus is on shale, Alaska, things that have really low costs. This is just part of their strategy.
Sciple: Yeah. You mentioned the low cost. I mentioned earlier that ConocoPhillips has really positioned themselves to thrive at lower oil prices. They called out that $40 number as where they're looking for for breakeven. As we push oil prices up closer to $60, you would expect them as we look into the first quarter to have a meaningful boost in profits. As we look out at those first quarter results, what should investors be looking for? What are the things we should definitely pay attention to when we get their earnings out?
Dilallo: Yeah, production's a big one for them. They've got some turnaround issues. Turnaround is when they do maintenance on some of their big facilities. There's some of that coming up. Production's actually on track to decline a little bit from the fourth quarter. However, the company has a history of under-promising and over-delivering. That's because shale wells have gotten so productive that companies have been able to just drill much more productive wells than they were expecting. I'm optimistic that they're going to hit the high end of that. That should enable them to beat earnings expectations again. The consensus estimate was $0.84, which is below last quarter, even though oil prices are higher.
One thing with ConocoPhillips, they've done such a good job reducing their costs that they made more money in last year's third quarter than they did in 2014, when oil was over $100 a barrel. This is a much more profitable oil company than it has been. They're continuing to make waves in that. They're using all those profits to buy back shares. They're really creating a lot of value for shareholders.
Sciple: They were the top-performing oil stock in 2018. Total return over 15%. Haven't moved nearly as much this year. But again, as you mentioned, positioning themselves to succeed at lower oil prices, with oil prices helping them by moving on up. Really seems to position ConocoPhillips in a strong way moving forward.
Matt, as we go away, I'm going to steal Mac Greer's closing question he does on every MarketFoolery. I think it's a great one for this episode because we covered so many companies. Desert island question. Next five years, you can only buy one of these stocks and hold them for the next five years: Chevron, Kinder Morgan, Hess, Exxon, ConocoPhillips. Which one do you like and why?
Dilallo: As much as I follow the oil market, I have no idea what oil prices are going to do tomorrow, let alone in five years. So I'm going to stick with Kinder Morgan. First of all, they're natural gas. They also have more than 90% of their cash flow contractually secured through long-term contracts. I think that they're the way to go for stability. The other ones could outperform, but that's oil price driven. But if I'm not touching it, Kinder Morgan is my name.
Sciple: Yeah, Matt, I tend to agree with you. I think these E&P guys, when oil prices cooperate, you can really make outstanding returns. But it's really tough to predict. When you have a company like Kinder Morgan, it's a toll road. They're going to collect their money regardless of how prices are moving. With things like the Permian and these shale plays exploding, there's going to be increasing need for takeaway capacity. And that's what Kinder Morgan is there for.
Matt, thanks so much for coming on the show! I think we really laid out some things for our listeners to watch it as earnings come through this quarter. We'll continue to follow them. We'll have you back on soon as we get more information!
Dilallo: Thanks for having me!
Sciple: Awesome! As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass! For Matt Dilallo, I'm Nick Sciple. Thanks for listening and Fool on!
