Over the nearly two-year trailing period, both the U.S. and the rest of the world have suffered radical changes — so much so that some of the adjustments could be permanent. That specter has put plenty of pressure on investors. But easily one of the most perplexing opportunities right now is in oil stocks.
Although fossil fuels powers the majority of transportation today, the growing consensus among financial analysts is that electric vehicles (EVs) are the future. If so, that implies an inevitable negative outcome for oil stocks. However, one outlook from Bank of America (BofA) suggests contrarians ought to reconsider this tricky sector.
Earlier in the summer, BofA Global Research stated that it’s possible oil prices could hit $100 per barrel over the next six months. The research noted, “If winter temperatures in the northern hemisphere turn out to be below seasonal norms, oil demand would spike.” Should that narrative materialize, it’d be a welcome catalyst for the industry.
But that’s not all. Analysts also believe “the robust global oil demand recovery will outpace supply growth over the next 18 months, further draining inventories and setting the stage for higher oil prices.” So, while the broader narrative is geared toward clean energy sources, the practical story is that combustion still rules the day.
That said, just like any other market segment in the new normal, nothing has a clear consensus. Before acquiring any shares, you should always do your due diligence. For instance, think of the potential global damage from China’s commercial debt crisis. Still, the narrative could swing in favor of fossil fuel, so definitely consider these oil stocks.
- Exxon Mobil (NYSE:XOM)
- ConocoPhillips (NYSE:COP)
- Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B)
- Devon Energy (NYSE:DVN)
- Murphy USA (NYSE:MUSA)
- HollyFrontier (NYSE:HFC)
- EnLink Midstream (NYSE:ENLC)
Oil Stocks to Buy: Exxon Mobil (XOM)
Since peaking in 2014, Exxon Mobil shares have dealt with a worrisome paradigm shift, a slow but gradual move away from combustion-based fuels to alternatives like hybrid solutions and battery EVs. Further, the oil giant never truly recovered from the devastating commodity crash during the middle part of the last decade.
So, it comes as little surprise that Covid-19 was exactly the headwind that oil stocks did not want — and that many could not afford. While shares of XOM stock have thankfully bounced higher from their 2020 doldrums, the fiscal damage cannot be denied.
Last year, Exxon could only generate $178.6 billion in revenue, 11% lower than the awful year of 2016 when it posted a miserly $200.6 billion. On top of this, net loss was a staggering $22.4 billion. That’s in contrast to $14.3 billion in net income for 2019.
However, signs of encouragement do exist here. In the company’s first quarter of 2021, it posted net income of $2.73 billion. That was followed by $4.7 billion in net income for Q2. So, should Exxon benefit from a cynical tailwind — such as a colder-than-expected winter season — XOM may soon be one of the better oil stocks to buy.
Next up on this list of oil stocks is ConocoPhillips. A U.S. multinational oil firm specializing in hydrocarbon exploration, this company has made some big moves recently. For the past one month, COP stock has risen more than 20%. And over the five-day period? Shares have registered a gain of more than 7%.
Although society is clearly eyeballing a shift toward electric, integrating things like EVs on a mass scale may not happen for years (if not decades). So, at least for the immediate future, investors should not ignore oil stocks like COP — particularly if catalysts like the severe cold snap occur.
Fundamentally, what makes ConocoPhillips appealing is its broad exploration footprint. The company has significant projects in the lower 48 states as well as in Alaska. But it also has extensive interests in Europe (especially the North Sea) as well as in the Middle East, Africa and elsewhere.
Moreover, ConocoPhillips has responded relatively well to the pandemic, turning the bottom line positive in Q1 and Q2 2021. On a trailing-12-month (TTM) basis, the company is looking at revenue of $29.3 billion, only about 10% down from 2019.
Oil Stocks to Buy: Royal Dutch Shell (RDS-A)
If you’re going to stick your money exclusively in big oil stocks, you should consider expanding your horizons with international exposure. As such, Royal Dutch Shell could be a viable ticket.
For one thing, RDS-A stock and RDS-B stock have been on the move lately. Over the past five days, both sets of shares have gained approximately 6%. And better yet, the move isn’t entirely technical. Fundamental factors are at play.
In North America, a cold snap in the northern hemisphere could spark huge demand increases. But in the European market, catalysts have already arrived. According to a recent Reuters report, Shell said it’s “seeing more demand at some of its fuel stations in Britain as worries about lorry driver shortages prompted drivers to fill up their tanks.”
Plus, don’t forget Shell’s partnership with the Ferrari (NYSE:RACE) Formula 1 racing team. It’s one of the oldest deals in the sport’s history. As the series becomes more popular while the world normalizes, RDS can only see benefits.
Devon Energy (DVN)
Another company tied to the hydrocarbon exploration business (along with being a producer), Devon Energy offers a viable alternative to major international oil stocks. This is an independent oil and gas company with operations focused onshore in the United States.
In many respects, having a bigger footprint is advantageous, particularly in a commoditized business like hydrocarbons. I understand the marketing gimmicks that downstream operators and retail fuel distributors deploy. But oil is oil. Plus, if the global economy encounters weakness, consumers will likely flock to the cheapest price.
However, broader exposure can also have its downsides. Given the geopolitical rumblings that we’ve seen in the trailing year, some investors will undoubtedly appreciate the stability of a domestic name like DVN stock. Better yet, this hometown advantage also comes across on the financial print.
As with every other oil firm in the exploration business, 2020 was a terrible year. Devon suffered a net loss of $2.7 billion. But the difference is that, in the first half of this year, the company has been accelerating at a faster rate than other oil stocks. On a TTM basis, Devon has generated $7.9 billion in revenues, which is actually 23% above its 2019 tally.
Oil Stocks to Buy: Murphy USA (MUSA)
Although oil stocks have generally suffered steep fiscal losses from the pandemic, some participants did not feel the same impact. Case in point? Murphy USA, a chain of gasoline stations and associated convenience stores often strategically located near big-box retailers.
In 2020, not only was Murphy’s net income positive at $386.1 million, but it was also roughly 150% greater than 2019. To be clear, the company did take a hit on the top line. However, given the severity of the pandemic, most oil-related firms would kill for such a loss.
MUSA stock has benefitted handsomely from the unique circumstances of the new normal. As Fox Business pointed out earlier this year, the outbreak spurred a massive sales rise in recreational vehicles. At the time, few people wanted to sit on crowded airplanes, so many took to the open road for their vacations.
Now, the only knock against MUSA is that it’s overvalued on paper. If you can look past that, though, this pick of the oil stocks is tied to a resilient subsegment.
When it comes to oil stocks, most people are familiar with the usual suspects, some of which I analyzed above. But on the other end of the spectrum are independent firms like HollyFrontier. Hardly what you would call a household name, the gradual recovery from Covid-19 might soon have your financial advisor calling you up about HFC stock.
Why? Among the many products that HFC specializes in, the manufacturing and wholesale marketing of “gasoline, diesel and ethanol-blended transportation fuels supplying automobiles, light trucks, aircrafts, trains and heavy equipment” could become extraordinarily relevant over the next several months and years.
Sure, it’s a risky concept. But investors who are confident in a return to air travel shouldn’t bank on individual airliners alone — they should also consider downstream opportunities in names like HFC. After all, the busy winter season is upon us, so travel demand could spike. Plus, a growing return to business travel would doubly benefit both airliners and fuel distributors.
Oil Stocks to Buy: EnLink Midstream (ENLC)
Last up, for a well-rounded portfolio of oil stocks, investors ought to look into midstream companies. These firms serve a critical role in the overall energy supply chain, acting as the middle ground between raw commodities and the practical products that reach end-users.
Because this is my final pick, I’m also going to dial up the risk-reward profile by selecting EnLink. Priced at a few cents shy of $7 at the time of this writing, ENLC stock might attract the meme stock crowd. For full disclosure, I also own shares of ENLC myself.
Nevertheless, I’ve written about this name in the past and it’s been one of my best performers this year. The stock has climbed nearly 24% in the last one month. But despite already printing some incredible gains, shares could go farther if the $100 barrel prediction actually plays out.
Even if it doesn’t, however, a transition to EVs will probably take longer than many people anticipate, especially because of the costs. Therefore, as an investor, I’m personally comfortable holding onto my position here.
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On the date of publication, Josh Enomoto held a long position in ENLC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.