Five Big Oil Stocks to Buy As OPEC+ Nations Cut Supply

Paul Dykewicz

Five big oil stocks to buy as OPEC+ nations cut supply have slipped to the lowest levels since the start of the COVID-19 pandemic, while starting to rise again with petroleum prices as Russia President’s Vladimir Putin proceeds with his military invasion of Ukraine and attacks on his neighboring nation’s power plants, residential areas and civilians.

Led by Saudi Arabia and Russia, the 23 oil-producing countries known as OPEC+ sparked criticism from President Joe Biden and other leaders in Washington who criticized rising energy prices and their negative economic impact on consumers and businesses. But members of the oil-producing OPEC+ bloc defended their decision by warning a weakening economy could depress oil demand.

Even though the “easy money” for many of the “old energy,” oil-weighted stocks has been earned after a “generational recovery” began in 2020, BofA Global Research wrote in a recent research note that exceptions include the recognition of value through asset quality, growth in sustainable free cash flow or balance sheet rehabilitation. Despite natural-gas-weighted exploration and production (E&P) oil companies offering the greatest absolute value opportunity in the U.S. energy industry, big oil stocks should benefit from future price increases. Recent intervention by OPEC+ may be an early signal of firming oil price support, BofA added.

Economic Trends Show Inflation Weighing on Markets and Affecting Five Big Oil Stocks to Buy as OPEC+ Nations Cut Supply

Interest rates are rising rapidly, with mortgage rates close to 7%, according to the Forecasts & Strategies investment newsletter led by Mark Skousen, a presidential fellow in economics at Chapman University. The 10-year Treasury rate is 4.24%, topping the 30-year rate of 4.15% and showing the start of a negative yield curve that is “bad news for the economy,” Skousen wrote in his latest edition.

Mark Skousen, Forecasts & Strategies chief and Ben Franklin scion, meets Paul Dykewicz.

“The Fed is famous for overdoing it, both when fighting recession by sending rates too low and fighting inflation by sending rates too high,” warned Skousen, who also leads the Five Star Trader advisory service that features both stock and option recommendations.

Fed Policies Aid Five Big Oil Stocks to Buy as OPEC+ Nations Cut Supply

The U.S. central bank and its monetary policy are largely responsible for the boom-bust cycle in the economy and on Wall Street, Skousen cautioned. The latest employment report was especially robust, adding 263,000 jobs as the unemployment rate fell to a multi-decade low of 3.5%, he added.

“This labor report confirmed what I have been saying with my gross output (GO) statistic, arguing that the United States is not in a recession quite yet, but it’s moving in that direction,” Skousen wrote.

The Fed is seeking to clamp down on high inflation that has topped 8% in the past year. Those who may have been inclined to trust the Fed’s past view that price hikes were “transitory” should note that the U.S. money supply rose 40% during the pandemic. Plus, Social Security payments will rise 8.7% in January 2023, boosting the buying power of 70 million American retirees but exacerbating inflation.

ExxonMobil Leads Five Big Oil Stocks to Buy as OPEC+ Nations Cut Supply and Russia Intensifies Attacks on Ukrainian Power Plants

After a bellwether quarter for both ExxonMobil (NYSE: XOM) and Chevron Corporation (NYSE: CVX), BofA expects both companies to reduce their risk exposure to an evolving macro-economic backdrop that is supported by “legacy industry underinvestment.” BofA predicted that sustained OPEC+ intervention, led by Saudi Arabia, will support oil prices.

“With that said, we see the relative investment case for both CVX and XOM diverging — with CVX anchored on legacy capital discipline and portfolio oil leverage, but with momentum swinging behind XOM, as five years of counter-cyclical investment drives divergence in free cash flow,” BofA opined. “While we see greater value with XOM, both names continue to offer low-risk leverage to higher long-term oil prices.

The dominant weight in the S&P energy sector is 1.4% for XOM and 1.0% for CVX, respectively. With both stocks moving quickly towards zero net debt within the next year, based on BofA estimates, the investment firm adjusted its price objectives to $136 per share for ExxonMobil and to $190 per share for Chevron. Those estimates assume BofA commodity team’s projected price of $100 per barrel for Brent in 2023, and a long-term $80 per barrel base case by 2025.

Chart courtesy of www.stockcharts.com

President Biden recently pledged that the federal government would buy crude oil for the U.S. Strategic Petroleum Reserve (SPR) near $70 a barrel. The move showed bullishness from a “price floor” standpoint, said Jim Woods, who leads the Bullseye Stock Trader advisory service.

Paul Dykewicz meets with Jim Woods, head of Bullseye Stock Trader.

President Biden’s announcement gave oil traders a new reason to take long positions in the sector, Woods said. For income and share-price momentum, ExxonMobil is an Income Multiplier recommendation in his Intelligence Report investment newsletter.

Chevron Shines Among Five Big Oil Stocks to Buy as OPEC+ Nations Cut Supply and Russia Attacks Ukrainian Civilians

Both companies have reset their balance sheets to step up cash returns, mainly through share buy backs, even though that practice was criticized by President Biden last week as he urged oil companies to give motorists reduced prices at the pump. At present, the absolute scale of buy backs is the same for both companies at $15 billion.

In light of their different absolute market values, the per share impact for CVX is about 30% higher than for XOM, but does not reflect buyback capacity, according to BofA. Assuming both management teams maintain buy backs at the current pace, BofA estimates suggest CVX net debt stabilizes at $3-7 billion.

However, with greater cash flow growth from projects secured at the bottom of the cycle, BofA sees XOM net cash building to more than $30 billion by 2025 and topping $60 billion by 2030. This is exactly what happened to Chevron with a slowdown in organic spending in 2015 that led to an inflection in free cash flow and significant outperformance compared with ExxonMobil for most of 2016-19.

Chart courtesy of www.stockcharts.com

ExxonMobil and Chevron Grow Free Cash Flow as Two of Five Big Oil Stocks to Buy as OPEC+ Nations Cut Supply

The two stocks have moved together but with growth in free cash flow, the funds a company can safely invest or distribute to shareholders. The investment firm projects a pending acceleration in free cash flow underpinning an extended period of relative outperformance for XOM, which remains BofA’s top U.S. oil major idea.

In addition, BofA has laid out in multiple reports a view that the long-term oil outlook is resetting after a period of industry underinvestment that “pushed control of oil markets” back toward OPEC+. With sustained intervention, risks to what the market is prepared to discount across the broader oil sector will skew higher, BofA added.

Using the midpoint of the recent trading range for Brent as a benchmark for where Saudi Arabia seemingly intervened to support a price range of $80-$100 per barrel, BofA sees $90 Brent as an upside level that would point to a potential rise of more than 20% for CVX and 30%-plus for XOM.

Marathon Oil Makes List of Five Big Oil Stocks to Buy As OPEC+ Nations Cut Supply

Marathon Oil Corporation (NYSE: MRO) has benefited from a recent rally in the price of oil to become the top commodity recommendation in Skousen’s Five Star Trader advisory service. In early November, dividend-paying Marathon Oil is expected to report annual earnings of $4.75 per share, up more than 200%, on revenues of $8.3 billion, climbing 52%, Skousen wrote to his subscribers.

Houston-based Marathon Oil is “dirt cheap,” selling for a price-to-earnings (P/E) ratio of 7.2, Skousen wrote. It has a price-to-earnings to growth ratio (PEG) of only 0.61. compared to the U.S. Oil and Gas industry’s 0.51, according to Zacks Research. Anything less than one is considered excellent, Skousen added.

A trailing 12-month (TTM) PEG ratio equals the P/E ratio divided by its growth for the past 12 months. The PEG ratio is aimed at giving a more complete picture of a company’s prospects than just a P/E ratio alone.

Marathon Oil is up 15.78% since Skousen recommended the position in his Five Star Trader advisory service on Aug. 14. BoA Global Research wrote that risks to Marathon Oil shares include oil and gas prices, a possible correction in refining profit margins, significant delays to the company’s new upstream projects that are critical to its production targets, as well as other factors.

 

Chart courtesy of www.stockcharts.com

Shell is One of Five Big Oil Stocks to Buy as OPEC+ Nations Cut Supply

Shell plc (NYSE: SHEL), a multinational oil and gas company headquartered in London, England, beat earnings estimates by 5% when reporting quarterly results on Oct. 27. The company’s earnings and production businesses were strong but its liquefied natural gas (LNG) operation, which involves trading, came in slightly weak, said Michelle Connell, who leads Portia Capital Management, of Dallas, Texas.

Connell pointed out a shareholder-noteworthy announcement of a 15% increase in Shell’s dividend that will begin in 2023. It marks a reversal from when the company cut its dividend in 2020 to clean up its liabilities, she added.

While the dividend cut initially was viewed negatively, it gave the company room to expand its green energy business, Connell said.

Shell also announced it will begin a $4 billion share buyback. While this is not definitively a signal that the shares are cheap, it does telegraph that the company’s management does not consider the shares “too expensive” at this point, Connell continued.

Shell is the world’s fourth-largest oil company in the world, following the largest three: Saudi Aramco, Exxon Mobil and Chevron. Of these four, Connell called Shell the “most environmentally friendly.”

Chart courtesy of www.stockcharts.com

Shell is targeting net-zero emissions by 2050, while Saudi Aramco, Exxon Mobil and Chevron are considered to be “very damaging” to the environment, Connell counseled. Plus, Shell will be building the largest green hydrogen plant in the European Union (EU), Connell added.

“Most oil stocks have appreciated so much this year that it’s difficult to buy them a discount,” Connell said. “However, Shell is selling at a significant discount to Exxon and some of its competitors.”

For example, Shell’s current price-to-earnings (P/E) ratio is 4.86, while ExxonMobil’s current P/E is 9.12. The difference may stem from Shell being viewed by some investors as a pure European Union play, while Exxon and Chevron are seen as U.S. energy stocks, Connell said.

Michelle Connell heads Portia Capital Management, of Dallas, Texas.

ConocoPhillips Is One of Five Big Oil Stocks to Buy as OPEC+ Nations Cut Supply

BofA’s price objective of $140 per share on ConocoPhillips (NYSAE: COP) assumes $80 Brent and $75 West Texas Intermediate (WTI) long-term prices. The investment firm also assume long-term Henry Hub natural gas at $4.25.

Risks to BofA’s price objective are an uncertain oil and gas price and margin environment, significant delays to new upstream projects critical to its production targets and challenges in capturing the price environment due to cost pressures such as operating expenses, capital expenditures and taxation. Outperformance could occur through increased oil prices and cuts to capital expenditures, BofA wrote.

Chart courtesy of www.stockcharts.com

Bivalent COVID-19 Booster Vaccines Could Help Sustain Oil Demand

A new bivalent COVID-19 booster in the United States offers protection against the omicron BA.5 variant, now the predominant strain of the virus. As a resident of Maryland, I arranged to receive the new booster after the state’s health department called me and informed me of the new booster’s availability at pharmacies near my house. Even though I obtained the vaccine on Oct. 16, there still are an additional 200-plus million Americans, who are eligible, but have not yet gained the protection offered by the latest booster.

COVID cases and deaths can hurt supply and demand for oil stocks, so availability of a new booster to enhance the vaccine’s efficacy could help protect from the virus. Cases in the country totaled 97,423,583, as deaths hit 1,070,138, as of Oct. 28. America has amassed the most COVID-19 cases and deaths of any nation.

Worldwide COVID-19 deaths totaled 6,587,818, as of Oct. 28, according to Johns Hopkins. Global COVID-19 cases reached 629,740,541.

Roughly 80.1% of the U.S. population, or 266,031,472, have received at least one dose of a COVID-19 vaccine, as of Oct. 27, the CDC reported. People with at least the primary doses total 226,933,827, or 68.4%, of the U.S. population, according to the CDC. The United States also has given a bivalent COVID-19 booster vaccine to 22,197,891 people who are age 18 and up, accounting for 8.6% of the U.S. population in that age range.

The five big oil stocks to buy as OPEC+ nations cut supply seem positioned for free cash flow growth, regardless of whether President Biden opposes their share buybacks. Despite high inflation, Russia’s continued attacks in Ukraine and rising recession risk after 0.75% rate hikes by the Fed in June, July and on Sept. 21, the five big oil stocks to buy as OPEC+ nations cut supply appear posed to avoid geopolitical pitfalls in the coming months.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many othersCall 202-677-4457 for multiple-book pricing.

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