The price of oil seems ready to rebound. There are two general groups of oil stocks to play this possibility – one with significant upside potential and a safer group that still offers a lot of promise.
At just over $71 a barrel, WTI crude remains above a key “support” level in the sixties. The commodity continued to see buyers come in at this level to support it for about a year and a half. This buying pressure is likely to continue as the economy looks set to stabilize next year after experiencing a deceleration in growth this year.
The Federal Reserve is expected to suspend interest rate hikes at its June 13-14 policy meeting as inflation showed signs of easing, although another rate hike is possible in July due to a stronger than expected labor market. . Either way, the end of the Fed’s monetary policy tightening means oil could continue to rally.
This should lead to equity gains for some oil producers, especially the more “sensitive” oil stocks, which gain the most when oil prices rise. The reason for this is that higher oil prices mean higher sales, and since these companies have a lot of fixed expenses, profits tend to increase even faster when sales increase. This is especially true for small oil producers.
Recently, oil stocks as a whole have seen less upside than usual when the price of the commodity rises. Indeed, stocks have already surged from lows at the start of the Covid-19 lockdowns when the price of oil bottomed out. This is why stocks of the most sensitive oil producers are worth looking at – they could still benefit from a surge in oil prices, while the gains of less sensitive stocks could be less spectacular.
(OVV), with a market value of $8.3 billion, was one of the most sensitive oil stocks in Gerdes Energy Research’s coverage universe. According to analyst John Gerdes, the value of the firm’s estimates for Ovintiv’s free cash flow should have a sensitivity of around 55% to the price of oil. WTI is up about 5% since late May when it hit key support, while Ovintiv stock has jumped almost 8%, much better than the
SPDR Energy Select Sector Fund
(XLE) gain of around 3% over the past two trading days.
Another oil producer to consider is the smaller
(KOS), with a market cap of $2.8 billion. It has nearly 35% sensitivity to the price of oil, Gerdes says, and the stock is up about 11% in the past two sessions. Investors looking for a bigger reward from rising crude prices could also look to the $5.4 billion oil producer
(MTDR), which has a sensitivity of just over 30%.
The problem is that everything works backwards. If oil prices – and sales – fall, these stocks and their earnings would theoretically fall the hardest.
This is why Gerdes is also showing less sensitive stocks, but still quite bullish given its future earnings estimates. The cash flow value for the $63 billion
(EOG) has a sensitivity of just under 25%, but Gerdes sees more than a 50% increase in the value of its future earnings.
s (COP) — a major oil company with a market capitalization of $120 billion — has a sensitivity of about 25%, with an increase in the value of its earnings of about 40%, says Gerdes. The $23 billion
(FANG), with a sensitivity of just over 25%, has nearly 45% upside potential.
Of course, oil inventories have already started to climb. Investors may want to catch them now or buy on weakness if the price of oil and stocks fall.
Write to Jacob Sonenshine at firstname.lastname@example.org