The Permian Basin is the largest oilfield in the United States. Since the first well was drilled in 1920, over 30 billion barrels of oil have been recovered, with at least 20 billion barrels remaining. And something big just happened in the oil industry down there.
Shell just sold all of their oilfield land to ConocoPhillips in an effort to go more green!
The 225,000 acres of land was acquired for $9.5 billion and makes ConocoPhillips one of the largest oil miners in the world. This land is expected to produce 200,000 barrels of oil, per day... With such a strong move towards more oil production for ConocoPhillips with such an opposite move in the other direction for Shell, it leaves many questioning who made the right decision. And the answer is: they both did. Shell is able to use this new cash injection to fund greener projects that will pay off over time while Conoco will be able to reap more profit and free cash flow today. However, the investment decision for both of them is very different. If you want to get involved in green energy or a high dividend stock play, the details below are crucial to know.
The Case for ConocoPhillips:
The acquisition of Shell's land came at a bargain for Conoco. Each acre of land cost them $15,000 which is substantially cheaper than the $60,000 per acre that Occidental paid for similar land back in 2019. Taking a strong stance on continuing their push into oil, this acquisition should help fuel sustained growth over the next decade. With this acquisition, we believe that Conoco can now increase their free cash flow (FCF), by 20% over the next several years. This increase in FCF directly translates to increased dividend payments as well as total stock returns. With more cash coming in via the increase in oil production, Conoco is now projecting to pay out over $75B to shareholders over the next 10 years. This insane fact cannot be ignored.
This means that they intend to pay out over 100% of their valuation in dividends over the next 10 years.
This is an extremely positive signal and will lead to stock appreciation with higher income yields. So how is this possible? It is largely tied to output.
Shell's land in the basin consists mostly of oil, gas, water & infrastructure land and rights. Conoco has come forward and said that they estimate this land to translate to 200Mboe/d of production relative to the current production of 175 Mboe/d. This 15% step-up in efficiency is huge for Conoco and should start materializing soon.
Mboe/d = thousand barrels of oil equivalent per day. It is a boring but important term in the gas & oil industry that helps measure output of a specific region.
- Price Target: $80 (30% upside)
- Target Date: 8-10 Months
- Dividend Yield: 2.95%
ConocoPhillips Disclaimer:
We realize that many people are against investments like COP due to their stance on pollution and dirty energy. And that is fine because the company below is looking to change their ways and lean more into clean energy! While we fully realize Shell is still a legacy oil company, they're slowly making strong strides in lowering their carbon footprint. If you want to play clean energy, take on low risk and get income, Shell is as strong as a play as any in their respective field.
The Case for Shell:
Everything you just read about Conoco is essentially the inverse for Shell. How so?
- Conoco is investing more into dirty energy while Shell is divesting ✔️
- Conoco got a bargain price for the land while Shell sold it at a discount ✔️
- Conoco is expecting for this investment to pay off immediately while Shell is more of a long term play ✔️
Therefore the rationale for the investment is going to be completely different. If you're a believer in Conoco, it is because you like the dividend growth play. If you like Shell it is because you believe in the future of clean energy, dividends and Shell's commitment to the space. Either way there is merit in both and each company has its own path towards being a strong investment. With Shell specifically though, the influx of cash should yield positive results for them and is also a strong statement to their commitment towards clean energy. Given the Permian Basin is one of the most important oilfields in the world, Shell selling their assets is extremely telling towards their real intention.
With an extra $9B of cash on their balance sheet, Shell can continue their commitment towards shifting their stance on pollution. While the long term use of funds is not yet known for the company, this is an investment into the long term goal of getting involved in clean energy. Pairing this with the recent court ruling where they were ordered by a Dutch court to slash their emissions harder and faster than planned, Shell's presence should start being felt soon. In the short term, the cash inflow will be used to increase dividends and increase returns for shareholders. We are waiting to see how this fundamentally changes Shell but it is an extremely strong early move for the Dutch company.
- Price Target: $50 (22% upside)
- Target Date: 8-10 Months
- Dividend Yield: 3.58%