Get ready for the bounce in oil stocks!
OPEC Oil versus Shale Oil – The Price War Continues
The turbulence in the global energy sector – oil and gas – has wrought havoc on oil stocks the world over. OPEC countries spearheaded by Saudi Arabia and the United Arab Emirates are determined to stay the course and continue supplying oil to the world at current volumes, refusing to relinquish market share in the process. They believe that the markets will find equilibrium on their own, and they are fully prepared to continue selling oil even if the price drops to $10 per barrel. Of course, this price paradigm is unlikely to happen in the foreseeable future. The fact of the matter is that OPEC is trying to squeeze US shale oil companies out of the market by reducing prices to levels that make it unprofitable to drill for oil.
The US shale oil industry is further hampered by higher costs in most every imaginable way. Relocation costs, drilling costs, exploration costs, and enticement costs for qualified personnel are markedly higher than they are for Middle East oil companies. Regardless, US shale oil companies continue to supply oil, even in the face of historically low demand. Inventories are rapidly building up, yet drilling continues unabated. A rational minded economist would look at the aforementioned scenario and deduce that the price of oil should continue falling until such time that demand catches up.
How Do We Know When Oil Has Bottomed Out?
This is indeed the billion dollar question. We cannot know with 100% certainty that the oil price has bottomed out and will move on an upward trajectory from here on. What we can do is look at the price movements in WTI crude oil and Brent crude oil and make calculated deductions about where we are headed, given the realities on the ground. It's also wise to take stock of the sentiments of leading energy traders who have deeper insights into the market mechanisms. Several such traders exist, including T. Boone Pickens and Andy Hall. These investors have made hundreds of millions of dollars anticipating the peaks and troughs in the oil price. Surprisingly, both of these investors have called a bottom in the price of oil.
One of the world's leading petroleum companies, Exxon Mobil (XOM, Financial), has seen some interesting developments in the price of its stock. Back on Feb. 25, XOM shares were trading at approximately $89. Since that time, the shares went on a downward spiral up until March 12. Many energy fund managers are suggesting that Exxon Mobil stock could well have bottomed out. The Chief Executive Officer of Exxon Mobil – Rex Tillerson - announced that a higher dividend is definitely on the cards for investors. Other factors to consider include the level of short selling of Exxon Mobil stock which decreased from 43.7 million shares to 42.3 million shares. This means that investors overall are less bearish about the future prospects of Exxon Mobil. Further, Goldman Sachs gave the stock a buy rating, further strengthening its attractiveness to investors. As always, it is foolhardy to assume that a mini rally and some stabilization in the price of the stock constitutes a bottoming out of the oil price.
What About The Dreaded Market Correction?
There is a very real concern that if the price of oil continues to slide further, perhaps to $30 per barrel, earnings estimates will be blown out of the water and stock prices will plunge. It will be difficult to justify buying the stock if the inevitable market correction comes to pass. Binary options traders are alluding to less put options on oil than before, but the general sentiment of energy stock traders trends on the bearish side. Banc De Binary commodities analysts admit to having seen lower levels of put options on oil and gas during March than in the last five months. Still, it should be kept in mind that when the world's wealthiest oil traders decide to go long on oil, the rest of us should pay attention. If there is going to be a bounce in the oil price, it is better to be on the upward trajectory than it is to get crushed by holding a bearish position. Of course, not every oil stock is going to generate the profitability that we expect. Traders need to seek out undervalued oil stocks with strong upward potential.
Oil Stocks to Watch
There are several oil stocks of particular interest to investors. These include Chesapeake Energy (CHK, Financial) which is presently priced at 67% of its book value with a dividend of 2.5%. In November 2014 the stock was trading at $22 when oil was priced at $80. Just recently, the stock was trading at $13.70 per share, on the back of slumping WTI crude oil prices and falling Brent crude oil prices. During March, the current market oversupply caused the price to tumble. Analysts have this particular stock pegged as a hold, but it is definitely undervalued and could spike by the end of the year. This company has strong revenue growth potential and its financials are sound. More importantly, net income growth is positive. On the flipside, performance has been dismal and the cash flow is less than adequate.
Another stock to watch out for is Oasis Petroleum (OAS, Financial). Back in November 2014 when the oil price was in the $80 range, Oasis Petroleum stock was trading at over $30 per share. It is interesting to note that some of the biggest investors in the stock include John Paulson (Trades, Portfolio) and John Sculley. The share price of Oasis Petroleum is now $13.07, also on the back of lower Brent crude oil prices and WTI crude oil prices. As inventories of WTI crude oil increase, so the oil price decreases. It should be pointed out that the stock is down almost 70% from a year ago, but valuations remain high. Big oil companies like Exxon Mobil (XOM, Financial) are snapping up relatively cheap oil companies during this bearish period. It makes sense to think strategically when it comes to oil, since the price will rise and so will the stock prices of the world's leading oil companies.
