Major oil companies have sold off in the last few weeks as the price of oil has fallen from a high of near $115 to a low of approximately $95 (several times). Many people think oil may fall still further to $90, $85, or lower. It may, although there is strong technical support at $90. The major oil companies stock prices could fall a little further, but they are generally oversold right now. Energy in general is oversold.
Most think oil is going to trend upward for the next several years as emerging market countries use more of it. Supply is not keeping pace with that increase in demand. Therefore the price of oil has to trend upward. As an example, the Chinese new car market is now the largest in the world. That market grew by 32% in 2010. It is expected to grow by another 10%-15% in 2011 (the Chinese Association of Automobile Manufacturers). EIA predictions are for a continuous tightening of oil supplies each year going forward. This means that any investment in a major oil company (with major oil assets) will likely pay off in the long term. These companies continually produce and explore for oil. They have many idle oil leases on which to find more oil. They make sure they have a continuous pipeline of development and production. Additionally they pay good dividends. This makes them good long term holds.
Some of the tax benefits of U.S. oil majors may disappear in the near future. Congress has been carping about the tax breaks they get. Still the multiples for these stocks are so low that any extra taxes should not substantially curb the price performance of these stocks longer term. In fact the extra taxes may just ensure that oil prices will trend more strongly upward.
Some of the oil majors to consider are Total (NYSE:TOT), Exxon Mobile (NYSE:XOM), Chevron (NYSE:CVX), and ConocoPhillips (NYSE:COP). They are all trading below their 50 day SMA’s. Curiously of all of these, TOT trades at the lowest multiples (PE=7.49 and FPE = 6.79). It has just had a big new gas and liquids discovery in Bolivia. It has bought a big stake in Sun Power (SPWRA) (a solar power company). It has the largest dividend. It will have fewer tax increases due to the U.S. Congress, since it is a French company. Still the others are well worthy of investment. All are substantial (>$100B market cap), fundamentally strong companies. All, except COP, have Beta’s under 1.0. All, except XOM, have Price/Book ratios under 2.0. If BP’s property sales to pay for the Gulf oil spill are any example, the book values of these companies assets are grossly understated (by twofold or more). These companies are "REAL" value stocks. If you can buy them on a dip in a time of long term up trending oil prices, you should make money.
Can oil stock prices go lower? Yes. Still if they are in a significant dip already, they probably won’t go much lower without a major recession. A fall in the Euro vs. the USD may hurt oil prices, but current EPS estimates are based on oil prices of about $90/barrel. Oil prices have farther to fall before they even start to impact projected profits. With the uncertainty of economic crises in the EU and Japan it is easy to be bearish. Still the geopolitical issues such as the unrest in the oil producing countries of the Middle East and Africa would argue for higher oil prices. These bullish situations should prevent a major downturn in oil. This means that the above mentioned stalwarts of the industry are all companies you can consider averaging into as this economic weak spot plays out this summer. Buying on dips should be a good strategy. Oil prices are still expected to rise substantially by the end of the year. Bank of America has said $160 is possible by year end 2011. However, almost all think $110-$120 is likely a minimum by year end 2011 given the overall picture of demand rising faster than supply. Oil companies should be hugely profitable with prices in this range. Two year charts of the above named companies are below. Judge for yourself the correctness of a technical buy at this point.
1 year chart of Total:
The Williams %R indicator shows TOT is oversold. The Fast Stochastic indicator shows TOT is starting to recover from an oversold state. This may be a good time to average in to TOT.
1 year chart of Exxon Mobile:
1 year chart of Chevron:
1 year chart of ConocoPhillips:
Neither the Williams %R indicator, nor the Fast Stochastic indicator show that XOM, CVX, or COP are oversold. You may be able to find a better point to average in. However, you probably won’t go too far wrong by starting to average in now. The above mentioned stocks are all below their 50 day SMA’s. TOT is the one that looks the most appealing both technically and fundamentally at this time. Even the recent news for TOT is positive. Still the others are good places to put money too.
Obviously if the futures Monday indicate a very weak start to the markets’ week, you may wish to hold off on purchasing any of these. If not, you may wish to start averaging in for your eventual long term position. Oil does seem fated to go up as the year progresses. You may not find a better opportunity, so you may decide to take a partial chance.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TOT, CVX over the next 72 hours.