Oil prices jumped to four-year highs in October, with Brent crude oil touching $85 a barrel, as investors focused on upcoming U.S. sanctions against oil-producing Iran and shrugged off a report showing a spike in weekly U.S. stockpiles.
Prices were already lifting in previous months thanks to commitments from the Organization of Petroleum Exporting Countries (OPEC) to extend production cuts through 2019 – and a dwindling of the world oil oversupply.
But prices have taken a bigger jump in recent days as the market looks to November 4, the date when U.S. sanctions against Iran take full effect. The focus on Iran has overwhelmed other news that might have otherwise sent oil prices lower – including a report from the International Energy Agency (IEA) that U.S. crude inventories rose by 8 million barrels in the last week of September. That was a jump more than four times what analysts were expecting and the largest build since the first quarter of 2017.
Oil prices are expected to rise for the foreseeable future and that should give a lift to a number of energy companies. You can find some very strong energy companies for 2018 by looking for two characteristics: 1) oil companies that have remained profitable, or 2) oil companies that acquired assets while oil was down, so they will be ready to profit from a continued rise in oil prices.
The below five public companies show promise for growth, based on quarterly income growth and revenue momentum. In addition, these companies have made significant moves to acquire assets that can produce profits going forward. All figures are current as of October 4, 2018:
1. EOG Resources Inc.
EOG Resources (EOG) has taken a unique stance. The company focuses on premium sites, meaning sites that are highly productive while costing less to operate. EOG looks for sites that can provide a 30% after-tax real rate of return. As Brent crude oil has crossed the $80 per barrel price, that return rate has risen.
EOG gained acreage in 2016 by acquiring Yates Petroleum. This gave EOG a strong presence in the Delaware Basin. In addition, the company has been selling low-quality acreage. EOG has been paring its income losses steadily for the past four quarters and showed positive operating income in its last quarterly report. It currently pays a dividend of 0.70%, but the play here is for growth.
2. Exxon Mobil Corp.
Exxon Mobil stock (XOM) has been seesawing in a narrow range for the last 12 months, closing at $81.79 on October 4, 2017, and $85.58 on October 4, 2018, for a gain of 4.6%. Although the stock fell as low as $72.67 in March, it has consistently found support at around $80 per share during this period, testing and holding that level several times.
The company’s income remained positive throughout the drop in oil prices, but has so far not benefited much from the recent recovery in oil prices. Earlier in July, both Exxon Mobil and its competitor Chevron (CVX) reported weaker quarterly earnings and revenue that missed expectations, reflecting the company's recent troubles in trying to boost its operations.
Despite the challenges, Exxon remains a company worthy of investor focus. The company's history alone is stellar: more than 30 years of growing its dividend, which currently pays 3.82%.
3. Enbridge Inc.
Enbridge (ENB) is not an oil driller. As a pipeline company, it is less susceptible to the ups and downs of oil prices. It currently has $20 billion worth of paying contracts. The company also says there is another $37 billion in contracts it is working to secure.
This means Enbridge will get paid no matter what oil prices do. Its merger with Spectra Energy (SE) in 2016 made Enbridge the biggest oil infrastructure company not just in the United States, but in all of North America. With a 6.08% dividend yield, this stock could provide both growth and income.
Ensco (ESV), a U.K.-based drilling operator, has seen its stock price rise over the last year as investors anticipated that it would successfully complete its purchase of fellow major competitor Atwood Oceanics. The company has reported improved quarterly results since then, with investors seeing optimistic signs in the company's outlook. Analysts also seem to expect good things from the company going forward, with Goldman Sachs recently reinstating coverage on the company with a "buy" rating.
Previously, Atwood Oceanics was on our list. That company contracts with oil companies who want rigs offshore. On October 6th, a majority of shareholders of both companies approved Ensco's $839 million all-stock purchase of smaller Atwood Oceanics. The combined company trades under Ensco and has benefited from the rise in global oil prices.
5. Comstock Resources Inc.
Comstock Resources (CRK) has positioned itself to increase revenues through a joint venture with USG Properties Haynesville. CRK gained access to 3,315 acres in the deal. It will have a 12.5% interest in wells on that property by offering itself as the operator. In addition, it can obtain an additional 12.5% interest by paying USG for any drilling on the acreage. This is a relatively low-cost way to boost revenues.
Perhaps most promising, Comstock has suggested that additional acreage is being discussed for future deals. The company has been reducing its income losses in recent quarters, and this deal is likely to provide the income boost the company needs.
The Bottom Line
Choosing the top five stocks in energy involves looking at more than past history at this point. Though a stalwart like Exxon can provide stability, it is a good idea to include stocks that have been unfairly punished by depressed oil prices. This group offers onshore drilling, offshore drilling, infrastructure, and value plays as a way to profit from energy in 2018.
The most profitable approach may be to create an energy portfolio that is diversified in a similar manner to this list. If the International Energy Agency is correct, oil prices could continue to rise through the end of 2018. The market tends to price in such moves in advance, so now is the time to consider the best players in the oil patch.