Is now the time to buy oil stocks? That’s the question among many, as novel coronavirus vaccine news helped to boost oil prices in November. Like with other industries, the outbreak had a major impact on the energy space.
With lockdowns and social distancing affecting crude oil and gasoline demand, it’s no surprise oil stocks posted terrible numbers in the past few quarters. Yet, with crude oil prices now firmly above $40 per barrel, the industry may be starting to get out of the woods.
That is to say, as we approach 2021, hard-hit oil companies could be heading back to profitability. With oil prices getting closer (or above) the break-even point, things are looking up for this hard-hit sector.
With this in mind, expect further gains, even after the strong performance in November. So, which oil stocks should you put on your watch list? These three names have started to recover, and could continue to head higher, in the coming year:
Oil Stocks: EOG Resources (EOG)
Since the vaccine news, EOG stock soared nearly 50%. But, even at today’s prices (around $53/share), there’s plenty more runway for this major E&P name. Before the outbreak, the stock changed hands at prices between $80 to $90 per share.
Yes, it could be years before energy prices fully recover to pre-outbreak levels. However, if prices stay stable (or head slightly higher) into the new year, expect EOG Resources to continue climbing higher. How so? Namely, as this commentator recently noted, its “incredibly low breakeven.” This could mean a big rebound in its cash flow, as energy prices rise far above its breakeven threshold.
That being said, there are some risks on the table as well. As Barron’s reported shortly after election day, the upcoming Biden presidency could hit EOG harder than other oil stocks. The reason? Its high federal land exposure. Biden made the end of new fracking leases on federal land part of his tentative energy policy.
However, given this doesn’t impact EOG’s current operations, it makes sense investors have put this risk on the back burner. Keep an eye on the geopolitical situation, but consider this one of the best energy price recovery plays.
Marathon Oil (MRO)
Earlier this year, I went bullish, then bearish, on MRO stock. But now, on the heels of the vaccine news, it may be time to dive back into this mid-sized oil exploration company.
Why? Now, with oil prices trending higher, this E&P play looks to be an even better asymmetric wager on oil prices than it did back in the spring. In other words, the potential gains in this stock if oil continues to climb vastly exceeds the risk oil prices, and in turn Marathon stock, pulls back from here.
How large are the potential gains? As InvestorPlace’s Mark Hake detailed earlier this month, the increase in free cash flow due to rebounding oil prices could send Marathon shares back to around $13.84 per share.
Yet, with this big upside potential, big risk remains on the table as well. The company’s relatively high debt position serves as a double-edged sword. If energy prices continue to head higher, investors buying now could see big returns. But, if oil runs out of gas, or even heads lower? Expect shares to tumble back toward $4 per share.
So, what’s the play with this high-risk, high-potential return oil play? Don’t bet the ranch, but a small position may be worthwhile at today’s prices.
Oil Stocks: Valero Energy (VLO)
After talking about two oil exploration stocks, lets dive into a name involved in the refining part of the sector. Like other independent refiners, VLO stock cratered as lockdowns depressed gasoline demand.
But, as it looks like we are starting to turn a corner, now may be the time to buy Valero. Even after shares have bounced back around 48% in the past few weeks.
Analysts at JP Morgan remain on the fence whether its all uphill from here for the refining business. Yet, they reiterated their bullish view on Valero stock, maintaining its “overweight” or “buy” rating. The reason? With its strong balance sheet, the company will be able to weather continued storms. And, if the macro case improves? Expect shares to continue heading higher.
But, that’s not all! As InvestorPlace’s Ian Bezek discussed Nov 6, the specter of a Biden presidency, but a Republican-controlled Senate, is another positive. The likely resulting congressional gridlock will help protect the company from Green New Deal-esque policies that could threaten the refining business.
Put it all together, and there’s plenty of reason why this high-yielding (6.92% annual dividend) remains an oil stock to buy as we enter 2021.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.