[Editor’s note: This article was updated on March 11 to add more up-to-date numbers.]
Energy traders started this week in full panic mode, even before Monday morning’s 20% collapse in oil prices. Adding to that, global stock markets were also crashing, which says the oil panic is justified. So anything we say here goes with a giant caveat that there is no need for anyone to be a hero picking a bottom in oil stocks.
Coming into Friday, these companies had already been suffering because buyers are terrified of catching falling knives. It turns out they were right to be scared this time. Over the weekend, Saudi Arabia declared war in the oil sector by slashing prices and flooding the market. This changes everything, and all assumptions for the sector are on hold until we can get more information.
Complicating matters are the fears stemming from the coronavirus and from within the oil fundamentals. Sentiment is at absolute extremes. First the virus put pressure on global oil demand as business activity faded. Second and what had been ongoing even before this epidemic broke out, the movement to alternative energies is gathering steam. This all culminated on Monday in a selloff so severe that trading actually halted for 15 minutes.
As a result, all spikes in oil prices or oil stocks have failed, so they are falling to extremes not seen for decades, hitting Exxon Mobil (NYSE:XOM), the Energy Select Sector SPDR Fund (NYSEARCA:XLE) and Chevron (NYSE:CVX). Last week, the leaders of both Chevron and Exxon Mobil reassured investors that they are have positioned their companies to endure here and thrive later. That is why their stock prices will hold up better than the rest amid this unrest. Unlike many of the energy companies, these two are on solid financial footing and have alternative initiatives to also contribute to reducing the human carbon footprint.
The Upside Of Falling Stock Prices
Since oil stocks have failed to maintain a trend, these three have been better trading vehicles than investments. But at a certain point the prices approach a value that supports the stocks. Value is not always measured by price-earnings ratio. Sometimes it’s measured by perception.
As a result of the price drop, CVX and XOM stock now boast sizable yields. As long as their cash positions are healthy, the dividends are probably still safe. With bond yields collapsing, one would expect that high, safe corporate yields will become more attractive to investors. Even if they cut the dividend size down a bit, it would still dwarf the 0.7% that the 10-year U.S. bond has.
Nevertheless, these are very uncertain times for the whole world, and prudence is king. There is no rush to load up on any equities with full-sized positions. It is okay to miss out a few upside bucks, especially early this week.
Oil Stock to Consider During this Correction: Chevron (CVX)
Among the losers, CVX stock is in better shape than Exxon. While they are both struggling of late on Wall Street, Chevron still maintains a monthly ascending trend of higher-lows since 2003. From that perspective, the buyers are still in charge in the long run. Finding support on this dip has been difficult, but that’s due to no fault of its own. As we’ve noted, this is a hostile environment to equities, and specifically oil stocks. Nevertheless, it has fallen into a major pivot zone dating back to 2007.
While the CBOE Volatility Index (VIX) is this high, it is impossible and unwise to assume that one line on a chart will do the trick. Instead, it is important to consider a wider band as an area where Chevron could find buyers for its stock. The February low is close enough to the aforementioned trend line that it’s important to hold in March. Else, the fall could accelerate into another leg lower to target the August 2015 low near $70 per share. If that happens, it would be a great dip to buy or add to existing long-term positions.
CVX stock had supports at $110, $105 and $100, but they all failed. Losing $105 triggered a bearish technical pattern that unfolded quickly last week. The $100 mark never had a chance to play a supportive role.
Job one for fans of the stock is to defend it here near the 2016 breakout line. Otherwise, patience is the best practice where there are so many questions.
Exxon is similar to Chevron, but their stocks are not acting in the same way. XOM stock lost its ascending trend of higher lows a while back. The sellers have been in control of it since 2017. Since then, it’s been a series of lower-highs and lower-lows that sliced through every potential support level.
Clearly Exxon has very few fans on Wall Street. To catch it here is an even bigger risk than CVX stock, and therefore requires stronger conviction than mine.
Once it lost $64 per share, it, too, triggered a bearish pattern with nefarious intentions. The 2004 breakout line near $44 per share did not provide support, so the support from that period is next to be tested near $35 per share. Under normal circumstance that would be a high-probability event, but with the VIX above 40 it’s a complete guess. Technically, prior breakout necklines are forward supports so maybe buyers will indeed step up, especially if oil prices get a reprieve this week. That is a lot of hopium, so caution is still of the essence.
Owning shares of Exxon has its reward. The fall from grace means that it now pays a whopping 8% dividend — and climbing. Management has not given us reason to think that they are about to cut it. Eventually this will invite interest from investors and funds seeking a return because all other fixed-income alternative are either zero or headed that way.
Energy Select Sector SPDR Fund (XLE)
The developments over the weekend with Saudi Arabia slashing prices have changed the game. So any investment in oil here carries a lot of hope that this trend will stabilize and heal.
This reaction and these price levels have not happened to this sector for decades, so there are no expert opinions. Common sense suggests to avoid betting blindly on the rebound without further information. So it’s best to avoid ETFs like the XLE and instead consider betting on the two best single stocks within it. At least Chevron and Exxon are not in debt structure danger like many of the others in those funds.
The XLE is falling into the 2005 breakout so the zone should be support. But this drop could eventually bring the all-time low prices, as there is no absolute science to catching this falling knife. It’s nothing short of hoping that cooler heads will prevail. Being the hero too soon could turn out to be costly. It would be better to wait a few ticks — or at least use the options markets, where investors can leave big buffers by selling puts or put spreads instead buying shares outright.
Value here is not a compelling argument to buy the shares, but perceived value may be. As we come to grips with the scope of the virus impact, and if we get the fiscal spending we should get, then investors will seek good bargains. Oil stocks will again look attractive, especially if the U.S. bond yields remain this low.