Oil prices, and shares of energy companies, have been on the rise over the past year. Paul Sankey, a New York-based oil analyst with Mizuho Americas, writes that the sector, particularly exploration and production companies, has "never been in better shape," as quoted by Barron's. The spot price of benchmark West Texas Intermediate (WTI) crude is up by 41% in the past year, per the U.S. Energy Information Administration. The futures market is anticipating an additional 2% price rise to nearly $70 a barrel by September, per CME Group, while some oil bulls are making the case for $100 oil later this year, per another Barron's story.
Barron's lists seven oil stocks covered by Sankey that are up sharply over the past year and which also have either buy or neutral ratings from him:
|Anadarko Petroleum Corp.||APC||62.3%|
|Devon Energy Corp.||DVN||36.9%|
|EOG Resources Inc.||EOG||36.0%|
|Marathon Petroleum Corp.||MPC||44.0%|
|Noble Energy Inc.||NBL||25.2%|
|Pioneer Natural Resources Co.||PXD||15.9%|
|S&P 500 Index||SPX||14.5%|
Source: Barron's; gains through close on July 26.
Sankey writes, per Barron's, that the oil industry has staged a strong recovery from the recent bottom in oil prices along several dimensions. He indicates that key areas of improvement are in resource opportunity, technology, management and strategy.
"More Volatile Environment"
Typically, oil prices are correlated with economic growth, the Wall Street Journal reports, yet have continued to rise even as worries about a global economic slowdown spurred by tariffs and trade wars have brought about downticks in other commodity prices and in emerging market stocks. Oil prices have experienced some wild swings in recent trading sessions, the Journal indicates, driven mainly by shifting concerns about output and shipments from several leading producing nations. Among those worries are whether President Trump will succeed in enforcing new sanctions on Iran that crimp its oil exports, and whether other producers such as Russia and Saudi Arabia will heed his requests to increase their output.
"It's trading on its own supply-demand equation and less of what's going on growth-wise and in the world," Craig Hodges, a portfolio manager at Hodges Funds, told the Journal. "Investors are probably looking at a more volatile environment for the price of crude," concludes Nathan Thooft, senior managing director of global asset allocation at Manulife Asset Management.
EOG: The Apple of Oil
Barron's indicates that, of the seven stocks mentioned above, Sankey is especially bullish on EOG Resources. His price target is $173, nearly 32% above its current price. He believes that EOG holds a similar place in the oil industry that Apple Inc. (AAPL) occupies in the technology sector, noteworthy for technical innovation and a strong culture, as well as disciplined use of capital. "The potential for rapidly rising cash return is excellent," he writes, as quoted by Barron's.
The Case For $100 Oil
According to data from the International Energy Agency (IEA) cited by Barron's, global supply and demand for oil are very tight, with average global demand for this year projected to exceed June's rate of production by about 300,000 barrels per day (B/D). Matt Badiali, a natural resources analyst at Banyan Hill Publishing, tells Barron's that there are several factors pushing oil prices upward: supply disruptions resulting from economic and political collapse in Venezuela, plus sanctions against Iran, as well as production increases by OPEC and Russia that, so far, are insufficient to close the gap between supply and demand.
The IEA forecasts global demand rising to 100.5 million B/D in 2019, up from 99.1 million B/D for 2018. The production rate in June, meanwhile, was 98.8 million B/D. Leigh Goehring of natural resources research firm Goehring & Rosencwaig, tells Barron's that Saudi Arabia, OPEC's leading producer, only has capacity to increase production by 300,000 B/D from current levels. For the last 18 months, he's been calling for $100 oil. Badiali, meanwhile, believes that $120 is possible in the fall. If these predictions come to pass, oil company shares will have significant upside.