Oil stocks have taken it on the chin in 2015. A global oil glut, weak consumer demand, record production from the U.S., a rising dollar and weaker corporate profits have hit oil stocks hard this year. Headlines have screamed bad news for oil stocks in recent months, with the most recent being the Iran nuclear agreement, which has stirred fears of a fresh glut of oil from Tehran being introduced into the market.
But bullish analysts are speculating that a bottom might be forming in the crude oil market, which bodes well in the long term for oil company shares.
Commodities are known for boom and bust cycles. Massive global production of crude oil has led to a roughly 50 percent drop in the price of crude oil from last summer’s peak. Now the low prices are causing oil companies to delay, cancel and halt production projects.
“Oil companies tend to panic, and they take too much supply off the table. We are sowing the seeds of the next gas crisis even as we speak,” says Kelley Wright, managing editor at Carlsbad, California-based Investment Quality Trends, a value-oriented newsletter, and chief investment officer at IQ Trends Private Client, the firm’s investment advisory arm.
“We will all wake up one day and there will be all this demand and insufficient supply, and the cycle begins again,” Wright says.
Of course, both radical wings of both parties are wrong: Overwhelming evidence from every independent research source has concluded that hydraulic fracturing of shale for natural gas has proven to be safe to our water supplies and is getting safer all the time.
Republican reticence to support natural gas expansion belies a long history of government incentives for developing new energy sources, from as far back as our development of coal to our much discussed modern tax incentives for crude oil exploration and production.
The current level of oil stocks may offer investors an opportunity. Not only has the hefty pullback in crude oil prices led to bargain-basement buying opportunities in oil stocks, but the energy sector is a proven leader during the end of bull market cycles in equities. The current uptrend cycle in the Standard & Poor’s 500 began in March 2009 and is now in its sixth year.
“Historically, energy stocks have been one of the best sectors to hold in late-stage bull markets. Since 1972, the energy sector has logged the best average performance among the 10 S&P sectors in the final year of a bull market, consistently seeing double-digit gains and beating the S&P 500 index in five out of six cases,” Hetrick says.
For investors looking for income, the drop in oil stock shares has seen dividend yields climb to attractive levels. Chevron Corp. (ticker: CVX) is trading at a steep discount to last summer’s high at $133. The stock currently trades at $93 with a dividend yield at 4.6 percent. Exxon Mobil Corp. (XOM) is also down significantly from last summer’s high of $103 per share and is trading at $82 with a dividend yield at 3.6 percent.
“Both Chevron and Exxon are at or slightly above areas of a historic high yield. Investors are getting the opportunity to buy world-class assets at an extraordinarily high dividend yield. I think you will be very well-rewarded down the road if you pick up energy assets now,” Wright says.
Other oil stocks. ConocoPhillips (COP) is one of the largest energy exploration and production firms in the U.S. and is a recommended stock from InvesTech now. “With significant global reserves and a focus on holdings in the Eagle Ford, Bakken and Permian plays, COP expects to grow production by 3 percent to 5 percent annually. The firm has a sound balance sheet and is committed to maintaining its dividend,” Hetrick says. The stock trades at near $56 per share with a 5.3 percent dividend yield.
Jefferies has upgraded two stocks in the oil services and equipment sector — Weatherford International (WFT) and Superior Energy Services (SPN) — from a “hold” to a “buy.” “We prefer stocks that provide services as part of the drilling process as opposed to companies that own the rigs,” Handler says.
Weatherford and Superior both provide equipment and services used in drilling for oil domestically and internationally. Weatherford stock trades near $11 per share, while Superior is about $18.65.
Another oil stock for investors to consider is Occidental Petroleum (OXY). New York-based financial information provider S&P Capital IQ has a “buy” recommendation for OXY with a 12-month target at $110, versus its current price of $71 per share. Occidental is an international oil and gas company. “It has one of the lowest debt ratios on the industry. If people need to slow down and drill less, they are in a better position to handle that because they don’t own as much,” says Stewart Glickman, group head for energy at S&P Capital IQ.
“The world runs on energy, and fossil fuels are the only viable economic model right now,” Wright says.