Is oil back? It certainly looks that way. After years of under performance, oil stocks appear to be making a comeback in 2021.
So far in January, energy stocks have been the top-performing sector, replacing technology securities. After Saudi Arabia cut its oil output, West Texas Intermediate (WTI) crude prices rose above $50 for the first time since February 2020, just before the novel coronavirus pandemic hammered the global economy.
However, even before the pandemic, the oil sector was a chronic under performer, posting a negative return of 39% between 2017 and 2020. Pretty sad. But now, with oil prices again topping $50 a barrel, it looks like there’s a glimmer of hope for oil stocks. Here are four companies to consider adding to your portfolio for the year ahead:
Oil Stocks to Buy: NextEra Energy (NEE)
NextEra Energy is a modern and diversified company. The Juno Beach, Florida-based company operates oil-based power generation and is the the largest electric utility company in the U.S. However, NextEra operates on a what it calls a hybrid model where it develops renewable wind and solar energy products while, at the same time, operating oil operations, electric utilities and various other fossil fuel plants. Having operations in every part of the energy sector makes NextEra Energy extremely diversified and successful. In mid-2020, NextEra Energy surpassed ExxonMobil in terms of market capitalization and was, for a time, the biggest energy company in America.
Not only is oil at $50 a barrel favorable to NextEra Energy, but the company’s renewable energy projects are likely to benefit under the administration of President Joe Biden. He has been vocal about tackling climate change and moving Americans off fossil fuels. The company has also produced stellar financial results, with a 40% increase in its third-quarter profit ended Sept. 30 and raised forward guidance of $10.15 per share in 2021. NextEra Energy also executed a four-for-one stock split in October 2020 that brought its share price down below $80 per share. And, the company pays a quarterly dividend of 35 cents a share on a split adjusted basis. NEE stock climbed about 13% in January.
Exxon Mobil (XOM)
As the largest oil company in America, Exxon Mobil should recover along with crude prices this year. The next 12 months certainly will not be as bad for the Irving, Texas-based company as 2020.
Exxon Mobil didn’t crumble during the pandemic. Despite the double whammy of a steep drop in demand and a price war that broke out between Russia and Saudi Arabia, ExxonMobil still managed to report decent revenue and maintain a quarterly dividend of 87 cents a share (its dividend yield of 8.7% is among the best in the energy sector, not just among oil stocks).
Not that continuing to perform well was easy. The company’s production level declined more than 10%., forcing Exxon Mobil to cut $10 billion from its capital expenditures last year. Fortunately, ExxonMobil was able to profitably extract oil from some of its fields, notably its offshore Guyana oil field.
Still, the valiant efforts of management didn’t save XOM stock from taking a big hit last year. The company’s share price cratered 56% last spring and remained stuck at around $31 a share until the end of October. Since then, the share price rebounded 57% and is now on the verge of breaking above $50 per share. The high price target on the stock is for it to get close to $80 a share this year. Should oil prices continue rising in the coming months, Exxon Mobil stock should rise right along with it.
Suncor Energy (SU)
Now for a Canadian-based oil company. Suncor Energy, headquartered in Calgary, Alberta, produces synthetic crude oil from Canada’s infamous oil sands. And despite the volatile ups-and-downs of the oil market, Suncor Energy counts some notable shareholders, chief among them Warren Buffett. The Oracle of Omaha’s holding company, Berkshire Hathaway (NYSE:BRK.B), currently owns nearly 20 million shares of SU stock, valued at $350 million. And, during the second quarter of 2020, Buffett increased his holdings of Suncor stock by 5 million shares. Clearly, Buffett sees something of value in Suncor Energy. One reason may be that Suncor runs the gamut of the oil business. The company owns everything from oil pipelines to retail gas stations.
Moving into 2021, Suncor Energy should benefit from increasing demand for oil around the world. Until then, the company has $8.6 billion of cash on hand to help it survive the tail end of the pandemic. As with all the oil stocks on this list, SU stock was beaten up pretty badly over the past year. When markets tanked last March, Suncor Energy’s stock plunged 71% to a low of $9.60 a share. Fortunately, it has nearly doubled since the end of October, rising 62% in recent months.
Chevron continues to operate like an oil company on a mission. The San Ramon, California-based company, after all, managed to complete a its $5 billion acquisition of oil producer Noble Energy last July despite Covid-19. Few things seem to slow down Chevron, which lands the company on this list of oil stocks to buy. And the company’s drive for market share should accelerate in 2021 as oil prices trend higher and the global economy recovers. Coming out of the pandemic, Chevron retains one of the best balance sheets among major oil companies and continues to make strategic investments wherever possible. The company is in a strong position to compete against its rivals, namely Exxon Mobil.
CVX stock too was badly battered in 2020, falling 55% during the depths of the pandemic to $51.60 per share. However, the stock has been lifted in recent months by rising oil prices, climbing 84%.
Many analysts and traders expect demand for oil to begin accelerating in May and carry forward through the remainder of this year. That should bolster Chevron’s operations and increase the company’s cash flow, all of which is good news for Chevron shareholders.
On the date of publication, Joel Baglole held a long position in BRK.B.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.