With the global economic recovery from the pandemic and oil-market disruption from the Russia-Ukraine war, the energy sector has been the best-performing sector in the S&P 500 for the past year.
While oil prices have pulled back recently, they’ve been making a strong comeback over the past month as measured by Brent crude’s more than 18% gain over that period. The U.S. benchmark, West Texas Intermediate, has gained more than 22% in that time.
Even as oil companies have been raking in money amid high oil prices, they’ve responded to shareholder concerns about overproduction by prioritizing dividends and share buybacks, helping keep the price of oil high. OPEC+, a Russia-led group of nations allied with OPEC, made a surprise announcement on April 2 that it would cut oil output, which further bolstered prices.
“Energy stocks have performed well as management teams have shifted to returning cash to shareholders,” says Rob Thummel, senior portfolio manager at TortoiseEcofin. “We expect capital discipline to remain in place so capital expenditures and production growth will remain low while dividends and stock buybacks will grow.”
Still, there are risks.
The oil sector is notorious for boom-and-bust cycles, which is one of the reasons investors want oil companies to be disciplined about production.
Thummel says the biggest risk is a deep global recession that dampens energy demand, while a secondary risk is that oil prices rise too high for an extended period, also causing demand destruction.
“Energy is critical and highly correlated to GDP and population growth,” Thummel says. “When economies contract, oil demand temporarily falls.”
For investors who want to take the plunge and buy stocks of companies with exposure to oil prices, here are seven stocks to consider:
— Exxon Mobil Corp. (ticker: XOM)
— Hess Corp. (HES)
— Pioneer Natural Resources Co. (PXD)
— Targa Resources Corp. (TRGP)
— Schlumberger Ltd. (SLB)
— Halliburton Co. (HAL)
— Marathon Petroleum Corp. (MPC)
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Exxon Mobil Corp. (XOM)
The energy sector represents only around 5% of the S&P 500’s market cap even though it accounts for more than 10% of its earnings, Thummel says. So he expects investor interest to grow in the sector as it becomes a larger percentage of the broader market. Meanwhile, Exxon Mobil trades at a discounted cash flow multiple to the overall S&P 500, he says.
“As energy becomes a larger percentage of the S&P 500, I would expect the cash flow multiple to expand and the XOM stock price to rise,” he says.
Also, the company is growing its oil production volumes in the Permian Basin, a prolific oil patch in Texas and New Mexico, he notes. XOM will also benefit from new oil production in Guyana and its minority ownership interest in the Golden Pass liquefied natural gas facility in Texas, which is expected to start up in 2024, he says.
Hess Corp. (HES)
Hess is a global crude oil and natural gas exploration and production company that also has exposure to Guyana. In fact, Exxon is the operator in a block where Hess has a 30% interest about 120 miles offshore of the South American nation.
“Based on the discoveries on the block to date, at least six floating production, storage and offloading vessels with production capacity of more than 1 million gross barrels of oil per day are expected to be online in 2027,” Hess says on its website.
International oil exploration potential is a boon for oil companies based in the U.S., where concerns about climate change and local health have led to political pressure against oil and gas exploration.
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Pioneer Natural Resources Co. (PXD)
Pioneer owns the Fain gas processing plant at the West Panhandle gas field in Texas, where it has more than 700 wells. The company also operates in the Spraberry/Wolfcamp shale reserves in the Permian Basin in West Texas and the Eagle Ford Shale oil field in South Texas.
Amid the greater industry shift favoring returning money to shareholders over expanding production, Pioneer has one of the most disciplined management teams in the energy sector, Thummel says.
“The company has almost no net debt and a free cash flow yield that is double the free cash flow yield of the S&P 500,” Thummel says. “PXD returns a significant amount of the cash it generates to shareholders via dividends.”
Targa Resources Corp. (TRGP)
Founded in 2005, Targa Resources Corp. isn’t a household name like Exxon, but that doesn’t mean it’s a bad investment.
In addition to providing midstream natural gas and natural gas liquids services, it also provides crude oil gathering, storing and terminaling, as well as storing, terminaling and selling refined petroleum products.
“Its revenues are primarily tied to rising production volumes in the Permian Basin, but TRGP benefits slightly from higher oil prices as well,” Thummel says. “In a world where energy security matters, the U.S. will become an important supplier of secure energy to the rest of the world with the Permian Basin being the primary source of growth in the U.S. oil supply.”
Schlumberger Ltd. (SLB)
Speaking of overseas activity, Schlumberger is one of the world’s largest international oil field services companies. That could be particularly important as, according to Thummel, the energy sector in the U.S. is having trouble hiring.
“The biggest impediment for the U.S. energy sector to grow is attracting and retaining people,” he says. “Drilling for oil and gas is very labor intensive. The negative sentiment associated with the sector over the last several years has kept people from entering the industry.”
But that may be changing, which would be a plus for oil companies operating domestically.
“Sentiment around the energy sector appears to be slowly changing, which will be a positive for stocks and attracting talent to the critical U.S. energy sector,” Thummel says.
Halliburton Co. (HAL)
Another leading U.S. oil field services company pursuing growth in the international market is Halliburton, which provides services including drilling and pressure pumping.
Its completion and production division delivers cementing, stimulation, intervention, pressure control, specialty chemicals and completion services. Halliburton’s drilling and evaluation unit offers field and reservoir modeling, drilling, evaluation and wellbore placement solutions for well-construction activities.
The company reported fourth-quarter revenue of $5.6 billion, up more than 30.5% from the same quarter a year ago, and $3 billion of the quarterly figure came from its international operations.
Marathon Petroleum Corp. (MPC)
Marathon Petroleum is an independent oil and gas refiner focused primarily on the U.S. Midwest, West Coast and Gulf Coast regions. It refines crude oil and other feedstocks; purchases ethanol and refined products for resale; and distributes the products using barges, terminals and trucks owned or operated by the company. Its Speedway retail business segment sells transportation fuels through more than 2,700 stores. The company also owns and operates crude oil and refined product pipelines.
Marathon’s fourth-quarter revenue came in at nearly $40 billion, up roughly 13% from the same quarter the prior year.
Like its exploration and production counterparts, Marathon has been returning cash to shareholders.
It returned nearly $12 billion to investors through share repurchases in 2022, and in November it announced a 30% increase to its quarterly dividend.
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7 Best Oil Stocks to Buy for Exposure to Crude Prices originally appeared on usnews.com
Update 04/14/23: This story was previously published at an earlier date and has been updated with new information.
