With so many fiscal and monetary variables at play, you can’t blame conservative investors from wanting to rotate out of risky equities into safer investments. At the same time, the variables themselves entice a contrarian position for those who can handle potential volatility. If you belong in the latter camp, wagering on oil stocks may be the ticket to success.
By now, it’s been roughly a year since most of America went into lockdown, naturally brewing pent-up demand. Therefore, it’s quite possible that we could see a resurgence in travel demand, which may finally help bring oil stocks out of the doldrums. As you know, the energy sector was one of the hardest hit as people were forced to curb their movements.
To be fair, the data isn’t 100% encouraging. There’s still a lot we don’t know about how the novel coronavirus pandemic will play out. However, the most important piece of information we have is that daily Covid-19 infections have fallen sharply from early January peaks. In addition, the vaccine rollout has generally been encouraging, contributing to the decline in cases.
Also, a traveler sentiment survey from CouponFollow.com indicates that demand is significant for getting out of the house. So yes, people want to travel, but they want to do so safely. Thus, whenever possible, folks are choosing to drive to their destinations, which bodes well for oil stocks.
You’ve probably heard that rising bond yields have unnerved investors, creating recent volatility in the market. But the implication is that possibly – and I do want to emphasize possibly – the labor market is on the mend.
If that is the case, you’ll want to consider these oil stocks as people get out and about to do more traveling.
- Chevron (NYSE:CVX)
- BP (NYSE:BP)
- ABB (NYSE:ABB)
- 3M (NYSE:MMM)
- Sunoco (NYSE:SUN)
- Phillips 66 (NYSE:PSX)
- EOG Resources (NYSE:EOG)
- Nabors Industries (NYSE:NBR)
- Marathon Oil (NYSE:MRO)
Given the uncertainty of the moment, though, I absolutely want to caution investors that oil stocks are for contrarian speculators only. Perform your due diligence and, don’t risk more than you can afford to lose.
Oil Stocks: Chevron (CVX)
If I had to build a portfolio of oil stocks with which to go against the grain, I’d choose Chevron. As one of the largest energy firms in the world, Chevron covers every aspect of the oil and natural gas business, from exploration and production to refining and transportation to power generation. Therefore, if a recovery happens, CVX stock is well suited for gains.
However, if a recovery doesn’t occur, CVX stock probably won’t send you immediately to the poor house. That’s because with the current transportation complex, we’re not going to switch to clean or renewable energy overnight.
As well, millions of workers have been devastated by the coronavirus pandemic. People need to gradually return to their normal lives and routines, which for the foreseeable future benefits CVX stock.
It doesn’t take a genius to understand that oil stocks don’t necessarily have the greatest reputation. In recent memory, BP represents all that’s wrong with this sector. Back in 2010, the BP-operated Deepwater Horizon oil spill led to the biggest oil spill ever in the U.S. Moreover, it was one of the worst environmental disasters in world history.
Indeed, the catastrophe inspired the film “Deepwater Horizon.” When Mark Wahlberg gets involved, you know some stuff is about to go down.
No, BP stock is not going to win any ESG (environmental, social, governance) accolades any time soon. However, that’s also part of its “charm,” at least on a technical sense. Over the last five-year period, BP shares are down around 13% while CVX is up almost 14%.
Cynically, there’s nothing better than another disaster to cover up one’s own. Therefore, BP stock might pleasantly surprise you.
On the surface, ABB may not immediately strike you as a big name among oil stocks. Rather, the Swedish-Swiss multinational firm is arguably best known for its robotics and automation technologies. However, the industrial technology company does significant business with the oil and gas industry, providing various systems and equipment for onshore and offshore oil operations.
This was a relevant underlying business of ABB stock before the pandemic. However, in the post-pandemic world, it’s become even more crucial. As I mentioned earlier, oil stocks have been gutted due to the Covid-19 crisis. They’ve got many challenges ahead, and every dollar saved through enhanced efficiencies matters much more than it previously did.
Further, ABB stock isn’t completely exposed to the energy market, since the issuing company offers valuable services across multiple sectors. In a variable environment, it pays to have something stable like this.
In the same vein as ABB, prospective buyers of oil stocks should consider 3M. True, MMM stock is mostly associated with applied sciences solutions and everyday convenient consumer products, such as the ubiquitous Post-it notes. However, some folks may be surprised to know that 3M provides economically compelling solutions for the oil industry’s three main components: upstream, midstream and downstream.
Of course, as people learn to live with the pandemic and venture out, this dynamic improves the bottom line for oil firms. In turn, this should lead to residual demand for 3M’s holistic supply chain services, which could benefit MMM stock.
Lastly, 3M is almost the perfect contrarian play on a return to travel. Thanks to its N95 respirator masks – which by the way are slowly starting to become restocked – 3M’s relevance is dual-pronged.
As I stated near the top, Americans want to travel but many are leery of doing so via public transportation. Instead, they prefer to get to their location in their personal vehicles. That suits Sunoco and SUN stock perfectly. As one of the largest companies of its sector, Sunoco “distributes fuel to over 5,000 gas station locations in more than 30 states.”
While I believe in the power of pent-up demand, I also think there’s a risk in assuming that Americans are that dead set on traveling. Rather, I believe most will take gradual steps back to their normal routines – first driving in their personal vehicles, then later trusting public transportation. If so, this dynamic suits SUN stock.
Plus, I like that Sunoco has a strong auto racing heritage. With the Super Bowl proving that you can host a major event during this pandemic, Sunoco’s racing-related synergies should rise this year.
One last note – Sunoco is a master limited partnership and thus has tax implications you should consider before buying SUN.
Phillips 66 (PSX)
Should travel make a comeback, Phillips 66 should warrant consideration in a portfolio of oil stocks. Primarily, the company has several fuel brands under its belt – its namesake Phillips 66, Conoco, 76, JET and Coop. These are “backed by a network of 11 refineries, 200 terminals and 7,000 branded sites,” according to the company’s website.
Naturally, as people hit the road, PSX stock should see continued strength in its already robust momentum. Even further down the line, Phillips 66 should be a relevant name, even with the “encroachment” of electric vehicles.
True, EV battery technology is constantly improving, and even more importantly, declining in cost. However, we’re still not quite to the point where EVs are readily accessible to the everyday consumer. Until that changes – and this transition may take longer than we previously thought – PSX stock may provide more smiles to speculators.
EOG Resources (EOG)
Following the initial devastation of the coronavirus, I was in no mood to entertain the idea of oil stocks. After all, the price of crude dipped to below zero at one point, an unprecedented occurrence. Therefore, I’ll hope you’ll forgive my lack of optimism for companies like EOG Resources. If demand was negative, I didn’t see how that would be net positive for EOG stock.
However, the overall resilience and come-back spirit of America pleasantly surprised me – one positive takeaway from an otherwise awful year in 2020. As a result, EOG stock looks considerably more attractive than it was during the Covid lockdowns.
True, EOG Resources’ core business of energy exploration doesn’t strike me as socially or politically relevant. While electric transportation is the future, when that future will arrive is anyone’s guess. For the foreseeable future, we still place tremendous value in fossil fuels for their high energy density and that ultimately benefits EOG.
Nabors Industries (NBR)
Thanks to improved economic sentiment and the implications this has for a return to normal, Nabor Industries has been one of the best-performing energy stocks this year. Since the first trading session in January, NBR stock is up around 107%. While I’m not the biggest fan of buying into momentum, it’s possible that there’s more legs left on this rally.
As an oil and gas drilling contractor, Nabors provides various services that keep energy exploration operations running as smoothly and efficiently as possible. Again, exploration doesn’t seem like a natural place to make money, not with the President Joe Biden administration at the helm.
However, we were all a bit surprised – well, not all of us if I may say so myself – when the U.S. Postal Service didn’t choose Workhorse (NASDAQ:WKHS) as the winner to provide next-generation mail carriers. This indicates that the electrification of transportation still has challenges ahead of it. And like it or not, this gives NBR stock a much-needed lifeline.
Marathon Oil (MRO)
If you really want to speculate with oil stocks, you may want to consider independent energy companies like Marathon Oil. Like virtually every company in this sector, Marathon suffered severely during the lockdowns. As a result, I didn’t want to touch MRO stock with a 20-foot pole.
Frankly, I’m not entirely sure how to approach Marathon and other oil stocks, because of the ambiguous nature of this economic recovery. While the labor market has improved since its valley last year, I’m concerned about the rampant speculation in equities and other investment categories. So, MRO stock is questionable.
Nevertheless, if you’ve got an iron stomach for volatility, Marathon may still give your portfolio some love. As I’ve explained above, the company’s core exploration business is very much relevant – all the more so as we work our way out of this recession.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.