The price of oil is suffering through a severe, precipitous downturn that’s seen oil prices plunge 54%, from highs of $101.33 per barrel to less than $47 per barrel in just over six months. Monday’s brutal selloff in crude — the price of oil was off more than 4% at the time of this writing — had prices of the fossil fuel flirting with lows not seen in nearly six years.
A strengthening U.S. dollar has much to do with the slump, as oil is priced in greenbacks. But the main factor driving energy prices lower is simple economics: there’s too much supply and too little demand.
Goldman Sachs Group Inc (NYSE:GS) and Société Générale SA (EPA:GLE) both cited this maddeningly elementary cause in recent days as the banks slashed their oil price forecasts. These two bearish outlooks were the latest in a series from major banks around the globe that have substantially cut their oil price targets and exacerbated the commodity’s decline. That’s an art known as the “self-fulfilling prophecy.”
Low oil prices are looking more and more like something that’s here to stay: Saudi Prince Alwaleed bin Talal told USA Today that $100 barrel of oil will not happen again. Said the prince,
“I’m sure we’re never going to see $100 any more. I said a year ago, the price of oil above $100 is artificial. It’s not correct.”
So, with the possibility of low oil prices that are here to stay, stock market investors need to know which companies will thrive and which companies will suffer.
Next: three stocks that are winners, and three stocks that are losers, in an environment of declining oil prices.
Best Stocks to Buy Now for Low Oil Prices: #1 — American Airlines Group Inc (NASDAQ:AAL)
Market capitalization: $37 billion
6-month performance: +12%
For anyone who hasn’t noticed, airline stocks are flying high right now, and the reason is cheaper oil prices. Fuel is by far the biggest cost for airlines, and reportedly accounts for more than 25% of the airline industry’s operating expenses.
While it may be cliche to comb airline stocks for a play on lower oil prices, that’s simply because it’s where the companies with the most to gain are lurking. American Airlines Group Inc (NASDAQ:AAL) is the best stock to buy now as oil prices fall, not merely because it saves millions with every penny energy prices go down, but because it does something no other major airline currently does: AAL refuses to hedge against rising oil prices.
The vast majority of airlines constantly place bets that the price of oil will rise; this way, if oil prices do rise, their increasing fuel costs are somewhat offset by the money made on their oil bets. But if they fall, their cost savings are diminished by the bets they placed on higher-priced oil that never materialized.
AAL stock is a winner because American Airlines doesn’t place those bets in the first place.
“…are rushing to finance losing bets on oil and revamp fuel hedges as tumbling crude prices leave them with billions of dollars in losses.”
Best Stocks to Sell Now for Low Oil Prices: #1 — Transocean Ltd (NYSE:RIG)
Market capitalization: $5.5 billion
6-month performance: -64%
Transocean Ltd (NYSE:RIG), which offers offshore contract drilling services, has seen RIG stock get absolutely mauled in the past six months as oil prices plunged. Although Transocean doesn’t actually own any of the underlying, stumbling commodity in question, integrated oil and gas players who bring big bucks to the table like BP plc (ADR) (NYSE:BP) have less economic incentive to spend money drilling for oil as prices decline.
Subsequently, Transocean has to lower its dayrates in an attempt to entice its customers to drill despite the smaller payoff. As contracts expire, some patrons may choose to abstain from re-signing contracts at all. With an aging fleet of oil rigs, a fair amount of debt on its books, and a 19.4% dividend yield that should last for at least another quarter, RIG is feeling the financial squeeze from crude’s massive decline.
With Goldman Sachs now calling for $40 oil and Transocean gracing the list of Portfolio Grader’s “10 Worst ‘Strong Sell Stocks’ This Week” several days ago, RIG is certainly a stock to sell if oil prices remain pressured.
Best Stocks to Buy Now for Low Oil Prices: #2 — FedEx Corporation (NYSE:FDX)
Market capitalization: $49 billion
6-month performance: +12%
Transportation stocks always get nice tailwinds when the price of fuel declines, and FedEx Corporation (NYSE:FDX) is no exception. Up 12% as oil plunged over the last six months, the Memphis, Tennessee-based FDX uses unfathomable amounts of fossil fuels as a necessity, like American Airlines. Those costs add up, and when they go down unexpectedly, FDX stockholders are the beneficiaries.
In a way, FDX stock is doubly exposed to falling oil prices, as U.S. consumers — who are on the heels of the best year for jobs creation since 1999 — keep saving money at the pump, giving them more discretionary income to spend on …well, anything that might need to be shipped.
Although FDX missed expectations in its last quarterly report, both the holiday season (December was excluded from Q2 results) and the cost reductions from lower fuel expenses should be boons for FDX stock. As of last month, the company expected earnings growth of between 26% and 33% for its fiscal 2015.
Best Stocks to Sell Now for Low Oil Prices: #2 — Goodrich Petroleum Corporation (NYSE:GDP)
Market capitalization: $130 million
6-month performance: -88%
Goodrich Petroleum Corporation (NYSE:GDP) is just flat-out not a stock you want to buy with energy prices falling off a cliff.
On Dec. 2, when oil was trading around $67 a barrel, the market was still in hysterics about the rapid fall. InvestorPlace contributor Aaron Levitt wrote an excellent article entitled “5 Energy Stocks to Buy at 5 Different Oil Prices,” listing five oil and natural gas companies and the oil prices those companies needed to see to remain profitable.
Unfortunately for GDP stock, Goodrich had the highest break-even levels on the list, needing oil to remain at or above $80 per barrel to turn a profit. Levitt explains that although Goodrich Petroleum has substantial acreage in the Tuscaloosa Marine Shale — which reportedly holds at least 7 billion barrels of oil — the technology to extract that black gold is wildly expensive:
“GDP needs oil to be at roughly $80 per barrel to justify the cost of fracking its substantial acreage in the region. And with oil currently in the $65 to $70 range, GDP is losing money with every well it drills. So it’s no wonder why GDP stock has fallen nearly 80% in the past three months.”
Just over a month after that article was published, oil prices have fallen another $20 per barrel, and GDP stock is off another 37%. On top of that, OPEC would like to see companies like GDP fail. Saudi Prince Alwaleed bin Talal said the following ominous words to USA Today on Sunday:
“…remember there is an agenda here also. Although Saudi Arabia and OPEC countries did not engineer the reduction in the price of oil, there’s a positive side effect, whereby at a certain price, we will see how many shale oil production companies run out of business.”
Those are some scary words if you’re a $130 million shale producer like Goodrich. Stay far away from GDP stock if you expect prices to continue falling.
Best Stocks to Buy Now for Low Oil Prices: #3 — JetBlue Airways Corporation (NASDAQ:JBLU)
Market capitalization: $4.3 billion
6-month performance: +36%
Yes, JetBlue Airways Corporation (NASDAQ:JBLU) is another airline stock that stands to benefit from falling oil prices because of the massive cost savings. But the truth is hard to avoid, and the truth is, JBLU stock is a strong buy as energy prices decline.
Not only does JetBlue, like all the other airlines, save money on fuel costs in the current environment, but as a regional provider, it’s much smaller than AAL, DAL, and LUV.
And if there’s one advantage to being smaller than its competitors, it’s that JBLU stock has the potential to grow faster than the major airlines because it still has loads of expansion opportunities.
Thankfully, JetBlue also isn’t in the situation that Delta and Southwest find themselves in, needing to unwind themselves out of some bold, risky, and ultimately expensive bets that the price of oil would rise.
With JetBlue also recently announcing new baggage fees and a planned increase to the number of seats on its Airbus A320, JBLU stock should start to reflect the ambitions of JetBlue CFO Mark Powers:
“As we execute this plan and continue to grow, we also seek to drive significantly improved returns for our shareholders.”
A little help from slumping oil prices shouldn’t hurt either.
Best Stocks to Sell Now for Low Oil Prices: #3 — Suncor Energy Inc. (USA) (NYSE:SU)
Market capitalization: $41.8 billion
6-month performance: -31%
The last of the three stocks you should sell as the price of oil slumps is Suncor Energy Inc. (USA) (NYSE:SU). In InvestorPlace contributor Aaron Levitt’s article outlining five major oil companies and the oil prices needed for them to break even, Suncor was second only to Goodrich Petroleum.
While Suncor stock would benefit if the much-delayed and debated Keystone XL pipeline ever goes through, Levitt sets those separate concerns aside. In his Dec. 2 article, he advises:
“Forget the problems with the Keystone XL pipeline. Canada’s oil sands industry needs high oil prices for it survive and make a serious profit. According to the investment banks research, that’s around $70 per barrel — roughly where we are today.”
SU stockholders wish oil was at $70 a barrel. No, it’s at less than $50 a barrel today, which means Suncor is losing nearly $25 a pop on each barrel of oil it produces. A month ago, it was producing just over 400,000 barrels per day, which, assuming production levels don’t change, amounts to losses of nearly $10 million every day.
As of this writing, John Divine was long Jan 2016 RIG $28 calls. You can follow him on Twitter at @divinebizkid.