Equity investors seeking to profit from rising oil prices amid escalating violence in the Middle East should focus on eight energy stocks and suppliers that are uniquely positioned to outperform. Stocks that could see the biggest sustained gains include energy producers Brigham Minerals Inc. (MNRL), Murphy Oil Corp. (MUR), Pioneer Natural Resources Co. (PXD), and EOG Resources Inc. (EOG). Also poised to benefit are energy industry suppliers such as valve and seal maker Flowserve Corp. (FLS), compressor maker Gardner Denver Holdings Inc. (GDI), valve maker Circor International Inc. (CIR), and General Electric Co. (GE), which owns 40% stake in Baker Hughes (BHGE). These stocks are highlighted in several reports in Barron's as outlined below.
Significance For Investors
It was the destruction of large parts of Saudi Arabia's oil fields over the weekend that pushed up oil prices by 15% by Monday, one of the biggest rallies ever. While oil prices fell by as much as 6% early Tuesday afternoon on reports that Saudi Arabia's oil fields will be back on line in two to three weeks, prices remain sharply higher than in recent months -- and more attacks in the Middle East could cause more oil spikes. These catalysts could push these 8 stocks even higher. Stocks such as Brigham Minerals, Murphy Oil Corp., Pioneer Natural Resources Co., EOG Resources and Circor International pulled back on Tuesday, but they still traded sharply higher than before the Saturday drone attacks on Saudi Arabia.
Oil Producers With Lowest Hedges
Goldman Sachs oil analyst Brian Singer recommends looking at energy producers that both have big exposure to oil and have the lowest level of production hedged for the fourth quarter, as outlined by Barron’s. Companies that have hedged more, using futures and options to protect against oil price declines, are locked in specific prices and have little upside. By contrast, EOG and Brigham have less than 10% of their oil output hedged for next year, which is less than half the 22% average among producers, according to Singer.
Industrial companies with high energy-end market exposure should also benefit from surging Q4 and 2020 demand if oil prices stay elevated, per another Barron’s report. These “oily” industrials provide supplies including valves, pumps and trucks to energy producers, processors and distributors.
Flowserve, which has fallen far from highs of over $70 per share in 2014, spiked this week to around $49 per share. The company generates about 40% of its sales from energy end markets. And Circor International attributes roughly half of its sales to energy end markets, compared to Gardner Denver Holdings, at about 30% of sales, per Barron’s.
GE stands to gain as one of the oily industrials with its 40% stake in Baker Hughes, which is now much more valuable due to rising oil prices. GE plans to sell part of its Baker Hughes stake in a secondary stock offering.
To be sure, stocks with the highest exposure to oil upside are equally at risk of falling if prices drop. The direction of oil prices after the attack in Saudi Arabia, and U.S. involvement in the Middle East, remains uncertain.