After an unfavorable year of disappointing earnings for companies that do business in oil and gas, investors are getting fired up about 2018.
The rising price of crude oil is fueling the excitement, along with a strong global economy and a forecast that U.S. oil production will surpass that of Saudi Arabia and possibly even Russia.
Forecasts show the U.S. producing an average of 10.3 million barrels per day (m/bd) in 2018. If it happens, it will be the highest production rate in U.S. history.
It’s easy to see why enthusiasm is running high. The market has been hurling hints of affirmation in recent months. Last week, oilfield services company Halliburton Co. (HAL, Financial) unveiled solid fourth-quarter earnings. The company’s shares are up 29% since fall.
And they’re not alone.
Integrated oil production giants like Chevron Corp. (CVX, Financial), Exxon Mobil Corp. (XOM, Financial), Suncor Energy Inc. (SU, Financial) and Statoil ASA ADR (STO, Financial) all have seen stock prices inch up by at least 6%; there also have been some double-digit increases.
Adam Sieminski, with the Energy and National Security Program in Washington D.C., says there is a lot of debate going on in the industry regarding the outlook for 2018.
Sieminski, who is at the Center for Strategic and International Studies, tells GuruFocus that is why many people are keeping close tabs on the Oil Market report that is published by the International Energy Agency. The other important publication everyone is watching is the U.S. Energy Information Administration’s monthly short-term energy outlook.
“Investors might pick up some signals from those reports about whether or not crude oil prices are going to stay at $65 a barrel, rather than fall back to $50,’’ said Sieminski, who is the James R. Schlesinger chair for Energy and Geopolitics at the Center for Strategic and International Studies.
“So if prices stay at this level, they are probably going to be inclined to own those stocks.”
So far, so good
Generally speaking, an oil company’s stock price is correlated to the price of oil. So the higher the oil price, the better the stock price.
Last year, prices were at $50 a barrel, not so great for stock prices. But so far this year, Brent crude has been listed at up to $69 a barrel. If prices stay high, it’s likely that drilling will pick up.
There is also the suggestion that a burgeoning economy will boost the demand for oil, which could consume any extra supply.
Another factor is the impact of an emerging market for battery-powered electric cars. Will these cars dry up demand for gasoline? How soon will the auto industry produce an autonomous vehicle that will be safe on roads and highways? Will people immediately trade up? There are many questions but few answers, so far.
Then and now
There’s a lot of speculation about what might happen if and when the U.S. gains the coveted role of largest producer of oil in the world. But it’s pretty clear that most of the growth in crude oil production will be the result of hydraulic fracturing or fracking. In fact, half of the production will come from fracking.
That is much different than 30 years ago when companies were engaged in conventional oil and gas production that involved vertical drilling. That was common until they realized they could be more efficient by drilling horizontal wells.
Later, shale was discovered and companies soon realized they could produce oil and gas by using high pressurized water to fracture or crack the rock.
Today, the industry is multifacted. It is made up of pure production companies, like Pioneer Energy (PES), whose goal is to produce oil. Shares for the company are up 73% since late October.
There are also those like Halliburton who provide oilfield supplies but do not produce the oil. Others, like Exxon, are integrated so they produce oil and gas, and operate pipelines and refineries.
Stocks to watch
According to GuruFocus, a number of Wall Street’s most popular value investors have invested generously in oil and gas.
Stock for the California-based Chevron Corp. has risen by 9% over the last three months. The company is ranked 6 of 10 in financial strength and 5 of 10 in profitability and growth.
It has a market cap of $241.6 billion.
In early morning trading, the stock was down 1% to $127.20.
The company has drawn guru investors like Ken Fisher (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss.
Stock for BP PLC (BP, Financial) is up 13% over the last three months. GuruFocus ranks its financial strength 6 of 10 and profitability and growth 5 of 10.
In early morning trading, the stock was down 0.16% at $43.28 per share. The company with headquarters in Denver has a market cap of $143 billion.
Investment gurus who hold BP shares include Kahn Brothers (Trades, Portfolio) with 1.4 million shares and Barrow, Hanley, Mewhinney & Strauss, which holds 37 million shares.
Other guru shareholders include Fisher (737,000 shares), Richard Pzena (Trades, Portfolio) (6.1 million shares) and Charles Brandes (Trades, Portfolio) (2.2 million shares.)
In morning trading, Exxon Mobile was at $88.21 a share, up 0.23%.
The stock has increased by 6% over the last three months. It also has increased by 3% over the last year. GuroFucs ranked it 6 of 10 in financial strength and 5 of 10 in profitability and growth. The company has a market cap of $374 billion.
T. Rowe Price Equity Income Fund holds almost 7 million shares of Exxon. First Eagle Investment (Trades, Portfolio) owns 10.7 million shares of the stock.
Other investors include Fisher, who owns 4.8 million shares; Kahn Brothers (17,034 shares), Pzena (4.1 milion), Donald Yacktman (Trades, Portfolio) (2.44 million), Tom Gayner (Trades, Portfolio) (544,800) and Dodge & Cox (131,530.)
Foreign companies
Some foreign oil companies, which are traded on the New York Stock Exchange, have also seen a recent rise in their stock price.
Ecopetrol SA ADR (EC) is the largest petroleum company in Colombia and among the largest in the world. Its shares have been steadily rising since a year ago when it was at over $9 a share. Its stock has jumped by more than 70% in the last three months.
GuruFocus rates the company with a market cap of $40 billion with a financial strength of 6 of 10 and profitability and growth of 5 of 10.
Barrow, Hanley, Mewhinney & Strauss own over 8.4 million shares of the stock.
Shares of Canadian integrated oil company Suncor Energy Inc.(SU, Financial) have risen by 16% in the last year. It is ranked 6 of 10 in financial strength and profitability and growth.
A number of guru investors prefer the stock. Dodge and Cox owns more than 40 million shares.
Others include First Eagle Investment (6.8 million shares), NWQ Managers (Trades, Portfolio) (1.6 million shares) and Ron Baron (Trades, Portfolio) (29,000 shares).
The stock of Colombian Ecopetrol SA (EC) has experienced an increase of 108% in the last year. Over the last few months, the stock has surged 89%.
On GuruFocus rankings, it has 5 out of 10 in financial strength and 6 in 10 profitability and growth.
Barrow, Hanley, Mewhinney & Strauss holds 8.4 million shares of the stock.
Royal Dutch Shell PLC (RDS.B) has seen an increase in the last three months of 18% and an increase of 34% in six months. The British-Dutch multinational oil and gas company has jumped by 27% over the last year.
The company, based in the Netherlands, has a financial strength of 6 of 10 and a profitability and growth of 5 of 10.
NWQ Managers owns more than 750,000 shares. Fisher owns more than 5,000 shares, as does Joel Greenblatt (Trades, Portfolio).
