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Are you looking for upstream stock play? Try big energy – fossil fuels, to be precise.
A combination of reductions in supply and increased demand has contributed to the surge in crude oil prices over the past two and a half months. Meanwhile, bank redlining – more on that later – indicates what could prove to be of particular benefit to the biggest players in the industry.
First, let’s review what happened with the product. Here is a chart showing the evolution of West Texas Crude Oil (WTI) continuous futures contracts since late 2013:
(FactSet)
Here is the action since the end of October:
(FactSet)
That’s a 51% jump in two and a half months.
Investors believed in the rally. Here’s how the 11 sectors of the S&P 500 SPX Index,
of the most significant US stocks occurred in the first half of January, along with data from prior periods:
Covid-19 vaccines give hope that the world can return to normal economic growth, possibly later in 2021. However, the winter peak in coronavirus cases has led the International Energy Agency to lower its forecast request for 2021. Again, the IEA report was released on Tuesday, and WTI for delivery in February CLG21,
was up 1.3% for the day.
Of course, it’s easy to give up on oil. The short-term trajectory of oil and natural gas inventories could be difficult from here – until the pandemic appears to be over. And in the very long term, the increased use of electric vehicles does not bode well for gasoline demand.
But all the electricity needed for the new power park has to come from somewhere, including power plants that use fossil fuels. Oil and natural gas producers will continue to refuel heavy vehicles, aircraft and ships.
A new form of redlining
Redlining, the old practice of some banks to avoid lending to entire regions, is illegal. But in the world of ESG investing – that is, environmental, social and governance – companies try to make sure that investors believe they are doing all they can to avoid supporting investments. activities that harm the environment, while improving society in various ways.
This has led many major US banks, including Morgan Stanley MS,
Wells Fargo & Co. WFC,
Goldman Sachs Group Inc. GS,
JP Morgan Chase & Co. JPM,
and more recently Bank of America Corp. BAC,
to decide not to provide financial support for the activities of oil drillers in the Arctic National Wildlife Refuge (ANWR) in Alaska.
The Biden administration could try to overturn President Trump’s decision to open drilling in the ANWR. But that doesn’t mean the big banks won’t cut back on their loans to oil companies drilling in other areas.
In his January 15 daily energy report, Phil Flynn, senior market analyst at Price Futures Group, wrote that small shale oil producers would bear the brunt of banks’ reluctance to lend to the industry.
“In other words, the ridiculed ‘Big Oil’ companies will grow bigger and stronger, while the small independents will crumble under the weight of more regulations and the inability to raise capital,” he wrote.
Wall Street’s Favorite Oil Stocks
So what does all of this mean for investors? You have the commodities – oil and natural gas – that have come under tremendous pressure. The price of crude oil is less than half of what it was not too long ago. Meanwhile, US shale producers faced a long chance of failing to break even last year. Going forward, OPEC countries and Russia are motivated to continue pushing up prices by managing supply.
When the pandemic finally ends, a euphoric backlash in the market could cause oil to explode even from current levels. Sustained economic growth could also support significantly higher prices.
Looking at the S&P 500, there are 25 energetic values. Here are all, ranked by the percentage of “buy” or equivalent ratings among Wall Street analysts. The table includes consensus price targets.
The table has a lot of data – you’ll have to scroll down to see it.
In addition to the odds information, there are 12 month price targets. Some of the targets are not much higher than current stock prices, even for companies with the most “long” or equivalent ratings. One year may not be long enough for a price target for a long-term investor, especially when it comes to a commodity recovery game depending, in part, on the end of the pandemic.
Dividend yields are included in the table. Exxon Mobil Corp. shares XOM,
have a yield of 7.27%. The company surprised at least some investors by not reducing its dividend during the pandemic, even when oil prices were much lower. Chevron Corp. Exxon’s rival, CVX,
also has an attractive dividend yield – 5.60% – with a much lower long-term debt-to-equity ratio (the far right column of the graph).
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