The oil price seems poised to rise. There are two general groups of oil stocks taking advantage of this opportunity — one with potentially great upside and a safer group that still has plenty of upside.
At just over $71 a barrel, WTI Crude remains above a key ‘support level' in the high 60's. The commodity kept seeing buyers at these levels for about a year and a half to support it. This buying pressure should continue as the economy looks set to stabilize next year after growth has slowed this year.
The Federal Reserve is widely expected to pause rate hikes at its June 13-14 monetary policy meeting as inflation shows signs of slowing, although another rate hike in July is possible on stronger-than-expected jobs conditions. In any case, an end to the Fed's monetary tightening means oil prices could continue to rise.
This should lead to stock gains for select oil producers, particularly the most “sensitive” oil stocks that gain the most as oil prices rise. This is because rising oil prices mean higher sales, and since these companies have high fixed costs, profits tend to grow even faster when sales rise. This is especially true for smaller oil producers.
Of late, oil stocks as a whole have seen less than usual upside potential when the price of the commodity rises. That's because stocks have already rebounded sharply from their lows in the early days of the Covid-19 lockdown, when oil prices bottomed. For this reason, the oil producer stocks with the highest sensitivity are worth a look – they could still get a boost from a breakout in oil prices, while gains from less sensitive stocks may be less spectacular.
(OVV) is one of the most sensitive oil stocks in Gerdes Energy Research's coverage universe with a market value of $8.3 billion. According to analyst John Gerdes, the value of Ovintiv's free cash flow estimates should show about a 55% sensitivity to the price of oil. WTI is up about 5% since late May when it hit its key support level, while Ovintiv stock is up almost 8%, much better than the
SPDR fund for the energy sector
(XLE) is up around 3% in the last two trading days.
Another oil producer to consider is the smaller one
(KOS) with a market cap of $2.8 billion. According to Gerdes, there is nearly 35% sensitivity to oil prices, and the stock is up about 11% over the past two sessions. Investors seeking a bigger reward from rising crude prices might also consider the $5.4 billion oil producer
(MTDR), which has a sensitivity of just over 30%.
The catch is that it all works in reverse. If oil prices — and sales — fall, these stocks and their earnings would theoretically fall the most.
For this reason, Gerdes also shows stocks with less sensitivity, but still with quite a lot of upside given his estimates of future earnings. The value of the cash flows is $63 billion
(EOG) has a sensitivity of just under 25%, but Gerdes sees more than 50% upside potential for the value of its future earnings.
s (COP) — an oil giant with a market cap of $120 billion — has a sensitivity of about 25%, with upside potential for the value of its earnings at about 40%, Gerdes says. The $23 billion
(FANG) has almost 45% upside potential with a sensitivity of just over 25%.
Of course, oil stocks have already started to rise. Investors may want to catch up now, or buy on any weakness if oil prices — and stocks — falter.
Write to Jacob Sonenshine at [email protected]