Energy: Accelerated Production Remains Central Pressure for Oil Prices

OPEC+ aimed to raise production by 547,000 barrels per day in September, with an additional 137,000 barrels per day scheduled for October. Still, barrels reaching the market will likely fall short of pledged volumes.

• The increases are the latest in a series of accelerated output hikes. The hikes are unwinding prior to production cuts that began in late 2023, a year ahead of schedule.
• Excess supply has yet to be reflected in inventory data or crude futures, primarily due to strategic stockpiling activity in China and summer seasonal trends.
• While more sanctions could more meaningfully impact Indian purchases of Russian oil, Brent prices mostly held steady during the quarter between the mid- and high-$60/bbl range. Traders largely shrugged off the latest supply increases.

If OPEC+ delivers on new targets, the market could become oversupplied next year. This would have a negative impact on the industry’s stock prices, but would also create long-term opportunities.

• We believe the increases are tied to efforts to take back share from US shale and political pressure to keep oil prices low. We don’t think these goals will change soon.
• Upstream capital expenditure will drop by 4% this year, according to Rystad. Offshore investments could fall by 4%, while shale spending could decline by 7%.
• Lower spending creates discounts in oilfield services. While both are 4-star stocks, higher shale spending headwinds are why we prefer SLB over Halliburton

Permian-dominant producers remain more likely to cut drilling amid current or lower pricing levels. Larger operators there can cut volumes without materially pressuring either their unit economics or capital efficiency. The Permian’s cost advantage of drilling new wells is also much narrower than serving existing wells. Diamondback and Devon again modestly lowered their full-year capital expenditures in the third quarter. These 4-star operators can still support their operations, investments, and capital returns.

Top Energy Sector Picks

Devon Energy

• Fair Value Estimate: $50.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Devon DVN stands to materially benefit from its business optimization plan, capital recycling from divestitures, lower taxes from the “Big Beautiful Bill Act,” and continued low-cost production from its crown jewel Delaware asset. In turn, we believe Devon trades at a highly attractive 14% yield to 2025 free cash flow. Strong FCF generation, coupled with its strong balance sheet, should allow Devon to return well over 50% of its FCF to shareholders, including $200 million to $300 million in undervalued repurchases per quarter.

SLB

• Fair Value Estimate: $50.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: High
• Morningstar Uncertainty Rating: Narrow

SLB SLB is among the cheapest stocks in our global energy coverage with a moat. Its multiple trades in line with peer services firms, but it deserves a premium given its scale, suite of solutions, competitive position in some of the more attractive services markets, and technological advantage. These factors position SLB to outperform peers. SLB’s offshore segment outside North America boasts a growing project opportunity set that could exceed $100 billion annually over the medium term. SLB’s digital-related revenue is also highly accretive and more resilient to cyclical headwinds. We expect digital revenue can more than double by the end of 2025 to $3 billion and possibly climb to $4 billion by the end of the decade.

Baker Hughes

• Fair Value Estimate: $51.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

Gas exposure has proven a way for investors to outperform broader sector headwinds. While most stocks with meaningful exposure look expensive to us, Baker Hughes BKR is an exception. The firm’s IET segment should benefit from the booming growth in LNG capacity. We expect this need will continue given demand from fast-growing economies, geopolitical risks, and energy requirements from data centers powering AI. The acquisition of Chart Industries should accrete shareholder value, position Baker Hughes to win in secular growth markets, and strengthen its aftermarket revenue.