Oil is on fire, in the best possible way.
Goldman Sachs Group Inc. (NYSE:GS) is telling investors to “buy, buy, buy,” like the black stuff is bitcoin and it’s 2016. OPEC has no incentive to keep production high, shale oil growth is being constrained by a pipeline shortage, and problems in getting oil out of hotspots like Iran, Venezuela and Libya will remain difficult.
This oil boom is not like the boom that came early in the decade. That one was marked by rising demand and a lack of alternatives. This time, traders know that renewables are cheap, and that their boom has a sell-by date.
For investors, this means there are two ways to play it. You can play it safe to limit your gains while minimizing risk. Or you can throw mad money into the pot, looking to get in and get out.
The Safe Way
The safe way to profit from the latest oil boom is with companies like Exxon Mobil Corp. (NYSE:XOM), which are highly diversified, pay a good yield and can survive the next bust.
Exxon grew its top line nearly 20% last year, revenue rising to $237 billion from $200 billion a year earlier. Net income from continuing operations doubled. Less than half the assets carry any debt, and long-term debt is just $26 billion, on assets of nearly $349 billion. Operating cash flow has been rising steadily.
Yet in some ways Exxon remains dirt cheap, despite a gain of about 10% just this month. The dividend of $3.28 per year still yields 4.22%, and the price-to-earnings ratio of 17.7 is below the current market.
Best of all Exxon would seem to have a lot of room to run. The shares, now at about $81, were at $94 back in 2016, and their peak at the top of the boom in 2014 was over $100 each. Exxon is not the kind of stock you usually look to for capital gains, but it seems to be sitting there waiting for you and, with the dividend, the company will pay you to play.
The Gambler’s Way
Another way to profit is on production from two oil plays that were almost forgotten during the bust, the Bakken and the Eagle Ford.
Production in both North Dakota and the arc from Laredo to Dallas has been rising with prices. Shares in Whiting Petroleum Corp (NYSE:WLL), the leader in North Dakota’s Bakken play, have nearly doubled since March. Marathon Oil Corporation (NYSE:MRO), which has also emphasized the Eagle Ford, are up 50% from its February lows.
But mind the debt. Surviving through the bust loaded up many oil companies with debt. I’ve picked these two to avoid that.
Whiting now has just $2.7 billion of long term debt on $8.4 billion in assets. Bonds it took out at 5.75% are now trading at over par.
Marathon had $5.5 billion in long-term debt in March, on assets of $21.6 billion, but the value of the assets has been in decline, so the debt-to-assets ratio has been rising. The company has remained cash flow positive, however, so the May 18 opening price of about $22 per share is just 11 times last year’s operating cash flow, which should be rising with prices.
The Bottom Line
The latest oil boom has a sell-by date. Today’s high prices could be taken out by any number of things. Peace might break out. Renewables, especially efficiency, keep rising. A revolution in Venezuela might bring that country’s production back online quickly. Supply and demand are finely balanced.
But while the profits are good, grab some.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.