The market is expecting a positive outcome from BHP Billiton Limited's (ASX: BHP) upcoming profit results, but one of its most disliked divisions could steal the spotlight.
I am referring to its dreaded unconventional oil assets that it paid too much for during the previous oil rush when shale oil was dominating headlines.
The world's largest miner has recently been shopping these assets around as the board came under pressure by activist shareholders to unlock value by ridding itself of these assets when oil was falling towards under US$50 a barrel.
News that the US has overtaken Saudi Arabia as the world's second-largest oil exporter as US production hit 10 million barrels a day for the first time in nearly half a century will put the focus back on shale assets.
The WTI crude oil benchmark actually rose 0.6% to US$64.86 a barrel, which is near a three-year high, as investors brushed off concerns about a glut in supply in the near-term and falling demand from the electrification of vehicles in the medium-term.
The International Energy Agency (IEA) is forecasting "explosive" growth for US oil production that could make the country the world's biggest oil producer. Russia is currently the top producer with around 11 million barrels of oil a day and Saudi Arabia produces just under 10 million barrels daily.
The IEA said that the US produced 10.038 million barrels of oil a day in November – the most since November 1970. Output is expected to rise to 10.3 million a day this year before averaging 10.9 million in 2019.
Most of this oil is from unconventional sources, or shale. I believe BHP's shale wells have contributed to the ramp up in output at a time when the WTI benchmark has surged 41% in the first half of FY18.
This bodes very well for BHP's oil division and will probably make it a star among other listed oil and gas companies like Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Beach Energy Ltd (ASX: BPT) as they don't have exposure to this booming thematic.
I wonder if this will prompt BHP to change its mind about selling its Eagle Ford assets as I can't imagine any shareholder giving the board a hard time about this business in the current environment.
Of course, there is still every risk that the oil price will fall given the supply-demand outlook. But like other industrial commodities, the prices have stayed resilient despite fears of oversupply and tapering demand.
The fact that the US is about to become the world's biggest oil producer doesn't change anything as this eventuality has long been flagged to the market.
This doesn't mean the oil price won't retrace this year, but I don't think we will see a collapse in the price of the commodity while global economic growth is set to accelerate in 2018.
I think there is value in the sector but we can't get too bullish on oil given the longer-term outlook.
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