Crude Surges: Buy These Oil Companies
This week, we have seen prices in crude oil surmount the level of $107 per barrel and while this could easily lead to some general difficulties in stock prices, there are clearly some sectors that will benefit from high market valuations in the commodity. Specifically, this should be viewed as an incentive for investors to consider moving into the energy space, as several names in Big Oil are trading at attractive valuations relative to the rest of the market. So, while you can use these market trends as an opportunity to buy the United States Oil Fund (USO), or any of the other major oil ETFs, the current climate offers strong indications that Exxon Mobil (XOM), ConocoPhillips (COP), and British Petroleum (BP) should be purchased as well.
Drivers of Broad Oil Prices
Three central factors are driving oil prices higher. Problems in the Middle East (specifically, Egypt) are being taken alongside evidence of increased summer demand for the commodity, and major declines in supply stockpiles. U.S. stockpiles in crude have shown a series of declines, with the latest data showing a reduction of 9 million barrels. Markets were prepared for a decline of 3.8 million barrels, and this helped propel prices above the $107 level. Gasoline supplies dropped by 3.5 million barrels, and this indicates increased demand often seen during the summer months. When we add to this the expected long-term demand in emerging markets, a bullish scenario emerges for the United States Oil Fund and other oil-based ETFs.
But currently, the same trends are not being seen in oil stocks. The S&P 500 has seen gains above 15% so far this year, but there are many examples in big oil stocks where gains have been far less -- or even negative on the year. Results like this light warning flares for some investors using the reasoning that if stock prices are not accurately tracking the underlying commodity, there must be something wrong with the companies themselves. But given the strong dividends that are seen in some of the Big Oil stocks, there is a sufficient buffer to shield against losses if the sector continues to trade with sluggish momentum. Add to this the low valuations that are currently seen in these stocks, and you have a clear case to start buying stocks in Big Oil.
Here, we will look at three choices, which are accompanied by the added support of high dividend yields. First, we look at Conoco Phillips, which has sold off many of its assets in an attempt to streamline its core businesses. These efforts have led to pick-ups in profitability, as there is more focus being placed on its exploration projects. Clear balance sheet improvements (following its asset sell-offs), and debt reductions of $6 billion point to long-term health in the company. P/E ratios in the stock are seen just above 10.8, and the 4.2% dividend yield add to positive prospects.
The Deepwater Horizon oil rig disaster that British Petroleum experienced in the Gulf of Mexico forced the company to implement major restructuring efforts of its own. A wide list of assets was sold off in diverse global locations, and this created another example of a company that was able to streamline its operations and improve profitability in its core businesses. Despite its disasters, BP's balance sheet remains healthy -- even with the exorbitant settlement costs that were seen after the events of 2010. BP's dividend was re-offered in 2011 and it has shown steady increases in the last two years. Current yields of 5% and its very impressive P/E at 6 make BP an excellent long-term option for investing in the rally in crude.
Finally, we have Exxon Mobil, the world's biggest independent energy company. What separates Exxon is its incredible diversity in operations. Most of the company's revenue is generated by exploration and productions operations (roughly 60%), which a majority of the remainder comes from its refineries operations. Stated goals at the company include the intention to build on its leading position as the largest U.S. producer of natural gas, an outcome that should be seen given the amount of resources being devoted to this end. Dividend yields in XOM are now at 2.7%. The stock's low P/E (9.4), excellent managerial reputation, healthy balance sheet and stable cash flow all add to the bullish argument.