Fortunes of oil stocks are, in general, linked to the price of crude oil. And demand and supply issues affect the price of oil. As global economies slowly reopen, the price of oil has been improving from its March lows. That’s why it’s time to evaluate oil stocks today to see if they fit in your long-term portfolio.
The commodity comes in different grades. Two different prices for crude oil usually get the most attention, specifically the global benchmark Brent crude and the U.S. benchmark West Texas Intermediate (WTI).
At the start of 2020, both were above $60 per barrel. However, by March, they were around $20. Now, Brent is back over $40 and WTI is around $37.50.
InvestorPlace readers may well remember that throughout most of 2019, crude oil was stuck in a relatively narrow $50-$60 price range. It felt more comfortable to be a bull on oil stocks back in 2019. Furthermore, passive income investors also relied on the juicy dividends paid by most energy companies.
However, this year’s decline in oil prices and the following volatility in oil stocks has changed things. Investing in this space is no longer for the faint of heart. Since March, many oil companies have cut their dividends. And those that have kept them may feel forced to slash payouts if there were another energy shock in the coming months.
While the short-term outlook for energy commodities and hence oil stocks may still look poor, oil’s plunge has created a viable opportunity to acquire quality oil stocks at potentially attractive valuations.
The three oil stocks I’ll highlight today are:
Let’s take a closer look at what makes each of these oil stocks hold long-term promise.
Oil Stocks to Buy: BP (BP)
Year-to-date, BP stock is down about 25%. By comparison, the Energy Select Sector SPDR ETF (NYSEARCA:XLE), which provides exposure to a broad range of large-cap oil stocks, is down about 22%.
BP produces about 3.7 million barrels of oil per day. As per its most recent quarterly results, the group is taking steps to cut its break-even oil price to $35 per barrel in 2021. In 2019, the break-even level was around $56. As the company approaches the $35 level, I believe investors can begin to relax about the potential adverse effects of a drop in the price of oil on BP stock.
The two business segments that make up most of the revenue are upstream and downstream activities. BP also owns about 20% of Russia’s state-owned Rosneft under a deal dating back to 2012.
Investors who are interested in alternative energy sources may also want to do due diligence on BP stock. Among oil stocks, BP’s alternative energy portfolio is likely to create long-term shareholder value. I expect the oil giant to transition successfully for a greener future. And that change may attract an entirely new investor base.
BP is one of the energy companies that has not yet cut dividends. However, this decision will likely place strain on the group’s balance sheet. The juicy yield currently stands at 9.8%. And the stock is expected to go ex-dividend next in early August. However, in case of a dividend cut in the coming months, investors would not hesitate to hit the “sell” button.
The shares have had an impressive recovery since March. I’d look to buy the dips, especially if the price goes toward or below $24.
In recent weeks, Saudi Arabia’s sovereign wealth fund has bought heavily into BP. By definition, such funds have long time horizons. Even though there will likely be further volatility in oil stocks in the rest of the year, I also believe BP should have a place in a long-term portfolio.
Canada-based Enbridge is a multinational infrastructure leader in the energy sector. It has a wide network of oil, gas liquids and natural gas pipelines. The group moves about 25% of the oil produced in the U.S. and Canada, and transports nearly 20% of the natural gas used in the U.S. The distribution and transportation network gives the company pricing power.
ENB stock currently trades around $34 per share compared to its 52-week low of $22.57 seen on March 18. Despite the recent recovery similar to that by many oil stocks, ENB shares are still down 15% for the year.
In early May, the group released Q1 earnings when it affirmed its outlook for the year. Adjusted earnings were 1.67 billion CAD or 0.83 CAD per common share for the first quarter of 2020, compared with 1.64 billion CAD or 0.81 CAD per common share in 2019.
Distributable Cash Flow (DCF) was 2.71 billion CAD, compared with 2.76 billion CAD in 2019. Analysts were pleased that the group reaffirmed its financial guidance range for 2020 DCF per share of 4.50 CAD to 4.80 CAD.
For passive income investors, dividend stocks form the backbone of a long-term portfolio. Like BP, Enbridge also has a high dividend yield of 7.3%. Analysts are debating whether the board may have to cut dividends in the coming quarters.
I believe the stock could be appropriate for investors willing to be patient and make a bet in the sector today. There might be a pullback in the stock price in the coming weeks toward the $30 level where there is considerable support.
Suncor Energy (SU)
Suncor Energy is another one of the Canada-based oil stocks that may deserve investors’ due diligence. It is a major oil sands developer. Canada’s oil sands are one of the largest petroleum resource basins in the world. The company describes oil sands as “a mixture of bitumen, sand, fine clays, silts and water. Because it does not flow like conventional crude oil, it must be mined or heated underground before it can be processed. Suncor produces bitumen in two ways, mining and in situ.”
So far in the year, SU stock is down about 35%. However that number tells only half the story. On March 18, SU stock hit a 52-week low of $9.61. Now it’s hovering around $21. Put another way, if you had invested $1,000 in the shares in late March, you would now have around $2,000.
On May 5, the Canadian oil major announced Q1 earnings. Management reported an operating loss of 309 million CAD for Q1 2020, compared to operating earnings of 1.2 billion CAD in the same period last year.
As a result of the uncertainty regarding the pandemic, the board cut the dividend by 55%. The next dividend will be payable on June 25 to shareholders of record at the close of business on June 4, 2020.
The company has reduced operating costs by 1 billion CAD (10%) compared to 2019 levels. It has also reduced 2020 capital expenditures by 1.9 billion CAD (33%) compared to plans announced earlier for the year.
Overall, investors were encouraged by the fact that management has been cutting costs dramatically, while continuing to focus on growth.
Despite the continued choppiness in oil prices, SU stock is a robust long-term investment among oil stocks. I’d look to buy the shares, especially if there is any weakness in the coming weeks. There may be short-term profit taking that pressures SU stock toward $17.50, where it should find important support.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.