In early 2012, Royal Dutch Shell's CFO stated that the company is planning for oil to trade for about $70 per barrel and even possibly drop to $50 per barrel. Some very bad events would probably have to hit the global economy for oil to dip to $50 a barrel, but as we have learned from the financial crisis, sometimes "unthinkable" events do actually happen. What might be unthinkable today, might seem plausible in a few months or less, especially when you consider the deteriorating fundamentals with Europe's economy.
Spain has massive unemployment at about 24%, plus new austerity measures that could even further weaken it's economy. Spanish and many other European banks are inadequately capitalized for additional losses that are likely in the future. There appears to be a real risk of an economic collapse in Spain and if that happens, there is probably not enough money to bailout other countries which could allow the contagion to spread to Italy, France and other countries. Since the European Union has an economy that is about the same size as the United States, a major recession or depression, could drag down the global economy.
This would probably lead to a major reduction in the demand for oil and in that scenario, a price of $50 per barrel seems more plausible. I don't expect oil prices to fall that low, but I do believe the global economy is slowing down and a pullback to around $75 is possible, especially since it was trading at that level in October 2011. If oil prices drop to that level, it will lead to significant long-term buying opportunities. Here are some major oil stocks I plan to buy at much lower prices:
Chevron Corporation (CVX) is a top pick for many oil stock investors as it is a leading producer of oil, natural gas, and also offers refining. It is a quality stock to hold, but it's best to buy it at the lows. Chevron shares are likely to drop with the price of oil when a possible global economic slow down arrives later in 2012. Furthermore, Chevron is facing a potentially significant liability from an oil spill in Brazil. Prosecutors in that country allege that Chevron should be held responsible for oil spills at one of its offshore projects, and they recently filed another suit which brings claims against the company to about $22 billion. Transocean (RIG) is also being sued by Brazilian officials.
There seems to be quite a different version of events and disputes on the size of the spill depending on which side the information is coming from, but regardless of who is right, the lawsuit could lead to significant expenses. It might also have long-term consequences for Chevron when drilling in that resource rich country. Until this case is resolved, investors could face ongoing headline risks. However, a continued decline in the price of oil could be what drives Chevron shares back to the lows of last year. Chevron shares traded down to about $87 per share in late 2011, and in a market correction that includes oil trading at $75 per barrel, the $87 to $90 level could be tested again in 2012.
Key Data Points For Chevron (from Yahoo Finance):
- Current Share Price: $103.03
- 52-Week Range: $86.68 to $112.28
- Dividend: $3.24 which provides a yield of 3.2%
- 2012 Earnings Estimate: $13.42 per share
- 2013 Earnings Estimate: $13.65 per share
- P/E Ratio: about 8 times earnings
ConocoPhillips (COP) is another leading integrated oil company that could test the lows of 2011, in the coming months. Some investors are excited because it plans to separate the refining business and spin it off to shareholders, around the second quarter of 2012. However, the refining business for many companies has been riddled with weak profit margins and the spin-off has been so well publicized for many months, that it could be a non-event for the stock price when it finally happens.
What investors should be focusing on is the fact that this company has recently been missing earnings expectations. The latest earnings miss has led to a decline in the stock, which has not appeared to find a short-term bottom yet. The stock might find initial support around $70 per share, which is close to the 200-day moving average, but if oil drops on economic weakness, the shares could be headed even lower. ConocoPhillips shares traded down to about $60 per share in late 2011, and in a market correction that includes oil trading at $75 per barrel, the $60 level could be tested again in 2012.
Key Data Points For ConocoPhillips (from Yahoo Finance):
- Current Share Price: $71.88
- 52-Week Range: $58.65 to $81.50
- Dividend: $2.64 which provides a yield of 3.6%
- 2012 Earnings Estimate: $8.79 per share
- 2013 Earnings Estimate: $9.19 per share
- P/E Ratio: about 8.2 times earnings
Data is 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.
