Elliott Gue and Roger Conrad
Elliott Gue and Roger Conrad, founders of the investment-publishing company Capitalist Times, McLean, Virginia, and editors of the Energy & Income Advisor newsletter. CapitalistTimes.com
Bottom Line: Higher oil prices are likely to stick around
Oil stocks have been dead money for the past five years despite the US transformation into a crude oil powerhouse because of fracking. Since 2014, energy-related stocks in the Standard & Poor’s 500 Index have dropped 13.5%, compared with a 63% gain for stocks in the overall index, including dividends, according to Morningstar Inc. But with global oil prices earlier this year hitting their highest levels since 2014, and with many analysts saying that they are likely to stay elevated for years, profits in this maligned sector appear likely to jump. A steep pullback in oil prices that started in October appears temporary, and a stock market correction has made oil stocks even more attractive.
Whether you’re an aggressive investor or a conservative one looking for income from dividends, the three analysts below say that there are great bargains among oil companies. Here’s why they say oil companies appear to be on the verge of a multiyear breakout, as well as the best oil stocks and oil-related exchange-traded funds (ETFs) to invest in now…
The performance of energy stocks is heavily influenced by crude oil prices, which swing up and down in cycles driven by the balance of global supply and demand. In 2014, there was a glut of oil, and the price of crude oil, as represented by benchmark West Texas intermediate crude, subsequently plummeted from more than $100 a barrel to $26 a barrel. By early 2016, oil stocks had lost nearly half their value.
But last year, the cycle of global supply and demand started to reverse itself. Accelerating economic growth in the US and other Western economies began to increase the demand for oil and by-products such as gasoline and jet fuel, plastics and chemical feedstocks, which led to lower oil inventories. Even the possibility of a US recession in the next few years is unlikely to sink oil prices because demand will remain high enough in many other countries that are in earlier stages of economic expansions.
At the same time, supply disruptions have intensified. Venezuela, a key exporter engulfed in political turmoil, saw its oil exports drop 40% in the past year. In Iran, the world’s fifth-largest oil producer, US sanctions are expected to reduce exports by perhaps 1.5 million barrels per day despite temporary waivers allowing eight countries to continue importing Iranian oil. This supply squeeze is likely to last for years because Saudi Arabia and other OPEC nations have been pumping oil at or near their maximum capacity. US oil companies cut their exploration and development of drilling projects after 2014, so it will be several years until a significant number of major new wells come online.
Investments likely to benefit now…
If you can stomach more risk and higher volatility for bigger potential returns, look at independent US oil producers that specialize in hydraulic fracturing, or “fracking,” and oil-services firms.
Marathon Oil (MRO) is one of the most attractive of the US exploration and production companies that uses fracking to release trapped oil from underground shale rock. The firm has remade itself, selling off more than $4 billion of its international assets and deploying the capital in the most promising shale sites in the US such as the Eagle Ford formation in South Texas and the Bakken basin in North Dakota. As of mid-November, the stock was more than 55% below its five-year high.* Recent share price: $16.68.
Core Laboratories (CLB) drills for data, not oil. This small, specialty oil-services company analyzes rock and fluid samples to help producers predict the magnitude of potential discoveries in new oil fields and to maximize recovery in mature ones. It focuses on the US shale industry, from which it generates about half of its revenue, but also operates in more than 50 countries. The stock was 56% below its five-year high, as of mid-November. Recent share price: $81.28.
TechnipFMC (FTI). The merger of Technip and FMC Technologies in 2017 created a major player in engineering, construction and equipment for subsea drilling. Both businesses had seen a dramatic decrease in revenues over the previous five years as low oil prices forced the cancellation or delay of deep-water projects. However, the number of new deep-water projects from major oil-exploration companies has nearly doubled from last year and is expected to rise through 2025. TechnipFMC’s underwater pipelines and remotely controlled robotic vehicles are essential to installing and operating wells on ocean floors. Recent share price: $23.94.
If you are seeking income from dividends and/or you prefer to own more mature, blue-chip companies with less stock volatility, consider…
Royal Dutch Shell (RDS.B), one of the largest and best-managed oil companies in the world. A strong balance sheet allowed it to keep paying its hefty dividend even when oil prices fell below $30 per barrel. Savvy moves have left Shell as the best-positioned of integrated oil giants. The stock recently traded at 14% below its five-year high. Recent yield: 5.8%. Recent share price: $63.78.
Enterprise Products Partners (EPD), which transports and stores crude oil and natural gas through 50,000 miles of pipeline, much of it strategically positioned in the largest shale-oil sites in the US. It is structured as a master limited partnership (MLP)—it operates much like a regular corporation but avoids corporate taxes by giving almost all of its income to shareholders in the form of dividend distributions. Enterprise Products Partners has raised its dividend every year since its 1998 initial public offering. As of mid-November, the stock price was 17% below its five-year high. Recent yield: 6.3%. Recent share price: $26.02.
Elliott Gue and Roger Conrad, founders of the investment-publishing company Capitalist Times, McLean, Virginia, and editors of the Energy & Income Advisor newsletter. CapitalistTimes.com
You can achieve low-cost, wide diversification in the energy sector with a carefully selected exchange-traded fund (ETF) that focuses on energy stocks. My two favorites now…
Energy Select Sector SPDR ETF (XLE) will suit conservative and moderately aggressive investors. It tracks stocks that make up the energy sector of the S&P 500. The portfolio is one of the least volatile of the energy ETFs available because it is dominated by giant, integrated oil companies such as Exxon Mobil, Chevron and ConocoPhillips that do business in many countries and have exposure to all levels of the energy business. Recent yield: 3%. Five-year performance: –2.3%.
iShares US Oil & Gas Exploration & Production ETF (XOP) is a more aggressive play focusing on the subsector of the energy industry most sensitive to the rise and fall of oil prices. It holds mostly small- and mid-cap stocks of US companies that search and drill for oil. Performance: –12%.
Todd Rosenbluth, senior director of mutual fund and ETF research at the financial-research firm CFRA, New York City. CFRAResearch.com
*All five-year performance figures are through November 15, 2018.
