Oil prices have started dropping and the decline might continue into 2012. A number of factors that had created a perfect storm to push prices higher are unwinding now. Those factors included speculators buying oil futures as a bet on a potential conflict over Iran's nuclear program and the belief that oil supplies were not meeting demand. However, Saudi Arabia has recently promised to adequately supply the market, talks over Iran's nuclear programs have turned more positive, and new concerns over a major recession or depression in Europe coupled with data that show China's economy is slowing down could continue to weaken oil prices. Slower growth in Europe and China is likely to greatly reduce oil demand in the coming months.
The biggest risk to oil prices might be the deteriorating situation in Spain, which may spread to France and other key countries in Europe. Bond yields in Spain have been rising, and it could be on the same path as Greece. As countries like Spain raise taxes and layoff government employees at a time when unemployment is already high, it just leads to further erosion, which could eventually spread throughout Europe and later on, the rest of the world. Many deflationary forces are at work now and lower oil prices could lead to much better buying opportunities for oil stocks in the coming months. Royal Dutch Shell (RDS.A) is a major oil company and the CFO recently predicted that oil could drop to about $70 per barrel in 2012. A $70 level for a barrel of oil could easily bring many major oil stocks to 52-week lows and maybe even lower. Here are some high-quality oil companies to consider investing in, if the stock prices fall further:
Total SA (TOT) is based in France. This oil giant is engaged in exploration, refining and it also operates a chain of fueling stations. Total shares are in a downtrend and it could be poised to test the 52-week low around $40 soon. This company is not just faced with a decline in oil prices, it is faced with a challenging situation due to a spill at its North Sea Elgin Platform. Investors feared that the Elgin Platform could explode and create an even bigger disaster, but that seems less likely now. However, the leak is still reducing production and the company said that the leak is costing close to $2 million per day. The company plans to kill the well and drill relief wells in the near future. The combination of the spill, the ongoing debt crisis in Europe, and lower oil prices could take these shares back to the $40 area in 2012.
Key Data Points From Yahoo Finance:
52-Week Range: $40 to $64.44
Dividend: $2.61, which provides a yield of 5.3%
2012 Earnings Estimate: $7.34 per share
2013 Earnings Estimate: $7.63 per share
P/E Ratio: about 7 times earnings
BP PLC. (BP) is a major integrated oil company that is still dealing with claims and potential fines from the spill in the Gulf of Mexico. While the spill has been mostly cleaned up, the liabilities remain hard to quantify and this poses a risk for investors. One article states:
If the judge sides with plaintiffs on the amount of oil spilled and determines BP was grossly negligent, the company conceivably could face up to $52 billion in environmental fines and compensation alone, according to an AP analysis.
Aside from this ongoing risk, BP is based in Europe, and that could mean reduced revenue as the European economy declines, and it also could translate into a weaker share price as most stocks are brought lower in any general sell-offs. There is a fair chance that BP shares will test the 52-week lows around $33 per share. Patient investors should consider waiting for that type of buying opportunity later this year.
Key Data Points From Yahoo Finance:
52-Week Range: $33.62 to $48.34
Dividend: $1.92, which provides a yield of 4.5%
2012 Earnings Estimate: $6.79 per share
2013 Earnings Estimate: $6.91 per share
P/E Ratio: about 6 times earnings
Chevron Corporation (CVX) is based in California and it is one of the world's largest oil companies. It engages in exploration, production, and refining. This stock recently hit a 52-week high, but it has been dropping with the price of oil. It also has been under some pressure due to an oil spill in Brazil for which it is being sued for billions of dollars in a civil case and is also facing criminal charges by a Brazilian prosecutor. Officials are claiming significant environmental damage and they appear very serious about making Chevron pay for it. This case is likely to drag on for a while and the headlines could continue to put pressure on the stock. If the price of oil continues to drop and hits the $70 per barrel level, it seems likely that Chevron shares will at least test the 52-week lows around $86, if not lower. I would consider buying Chevron if the stock falls to that level or lower.
Key Data Points From Yahoo Finance:
52-Week Range: $86.68 to $112.38
Dividend: $3.24, which provides a yield of 3.2%
2012 Earnings Estimate: $13.39 per share
2013 Earnings Estimate: $13.50 per share
P/E Ratio: about 9 times earnings
Data sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
