Oil prices have been rallying, but several big energy stocks have lagged behind, creating opportunities for strong gains once the latter catch up. "This divergence that developed a couple of months ago should resolve itself rather quickly with a nice strong rally, a continued rally in the energy stocks," as Matt Maley, equity strategist at Miller Tabak, told CNBC. Among the stocks that are poised to benefit are these nine: Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), ConocoPhillips (COP), EOG Resources Inc. (EOG), Occidental Petroleum Corp. (OXY), Valero Energy Corp. (VLO), Phillips 66 (PSX), Marathon Petroleum Corp. (MPC) and Andarko Petroleum Corp. (APC). (For more, see also: Top 4 Oil Stocks for April.)
The aforementioned stocks are, in order, the nine largest oil exploration and refining companies by market capitalization in the Energy Select Sector SPDR ETF (XLE), per Morningstar Inc., and are among the 11 largest overall, the other two being oil services companies. Collectively, these nine accounted for 65.75% of the ETF's value as of April 20, per the same source, with Exxon Mobil the largest at 22.62%, and Chevron second at 16.96%.
The spot price of benchmark West Texas Intermediate (WTI) crude oil has risen by 13.2% year-to-date, per Business Insider. Meanwhile, the S&P 500 Energy Index (SPN) is up by just 2.1% YTD, per S&P Dow Jones Indices, while the XLE Energy ETF is up by 2.8%, per Yahoo Finance. Both indices reflect the underperformance of their two largest components, as illustrated by the data below.
- Exxon Mobil: -3.9%, 16.7x
- Chevron: -0.3%, 19.4x
- ConocoPhillips: +19.9%, 22.3x
- EOG Resources: +6.8%, 22.6x
- Occidental: +6.1%, 28.2x
- Valero: +20.0%, 13.2x
- Phillips 66: +11.0%, 13.8x
- Marathon: +21.9%, 12.9x
- Andarko: +25.0%, 33.1x
In his April 17 comments on CNBC, Matt Maley mentioned the XLE Energy ETF as the investment opportunity that he was focusing on, rather than individual stocks that are components thereof. He said: "You could see 10, 12 stocks in the XLE that have broken out before Exxon has. If Exxon, being the biggest percentage holder there, can break above its February highs and make a new high, that'll attract more momentum to that stock which will bring more money to the XLE." Exxon's 52-week high was $89.30 in intraday trading on January 29. It closed Monday at $79.57, 10.9% below that high.
Gina Sanchez, CEO of Los Angeles-based investment firm Chantico Global, told CNBC that she likes Exxon Mobil on the basis of its 3.9% dividend yield, expected 18% year-over-year profit growth in the first quarter, ongoing benefits from tax reform, and the upward swing in oil prices. She also sees excellent long run "sustainability" for its dividend. (For more, see also: Big Oil Set for 2018 Bull Market.)
'Secular Shift, Fantastic Opportunity'
Larry McDonald, editor of the Bear Traps Report, told CNBC that he expects brisk M&A activity in the energy sector, which will boost share prices significantly. After a long bear market in energy prices, he sees a big turnaround developing. As he told CNBC: "This is a secular shift, a fantastic opportunity. The money is shifting toward commodities...We think it's in the early inning and could last two to three years."
Oil last fetched $70 a barrel in the U.S. in 2014, but that was in the midst of a steep drop in its price, The Wall Street Journal reports. A widespread opinion right now, the Journal adds, is that oil prices are in a benign range that makes oil companies profitable, while not crimping demand, hurting economic growth, or fueling inflation. Nonetheless, strong worldwide economic growth and production restrictions by OPEC are exerting upward pressure on oil prices, the Journal notes.
Falling Inventories, Rising Tensions
Another impetus for the recent rise in oil prices has been declining inventories of crude oil, gasoline, and other refined products in the U.S., CNBC indicates. Worldwide inventories also are falling to near their five-year averages, per the same article, which adds that Saudi Arabia is said to have set $80 as a target price. Demand for gasoline in the U.S. is nearly at summertime levels, CNBC continues, while geopolitical concerns mount regarding possible conflict-related supply disruptions in the Middle East. Meanwhile, there is speculation that President Trump may reimpose sanctions on Iran, with a May 12 deadline approaching for a decision.