Oil has made headlines during this coronavirus crisis, although not for reasons investors want to see. In addition to a lack of demand due to the virus shutdowns, Russia and Saudi Arabia entered a price war that sent the price of WTI crude futures under $12. Yes, the pizza you ordered for dinner last Friday cost more than 1 barrel of oil does at the time of this writing.
But, despite crises forcing the price down, both are hopefully temporary disruptions. Lockdowns won’t last forever and demand for travel will eventually return. The price war between Saudi Arabia and Russia might be vicious now, but neither side wants to see oil prices continue to plummet the way they have so far in 2020.
If you’re betting on an oil rebound, plenty of downtrodden stocks are currently trading at a discount. Here’s a few to keep an eye on.
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Overview: Oil Stocks
Oil companies like ExxonMobil and BP are some of the oldest and largest publicly-traded firms in the market. Despite environmental headwinds, the oil and gas industry is still a multi-trillion dollar business composed of several different subsectors and business models. Oil companies are split into 3 distinct groups based on where they function in the pipeline. The 3 different groups are:
- Upstream: Companies in the upstream subsector are involved in finding oil and pulling it out of the earth. Upstream companies search the globe for new oil reservoirs and assemble drill sites for extraction. Upstream companies often face significant financial hurdles since drilling and mining equipment is cumbersome and expensive. Occidental Petroleum (NYSE: OXY) and Whiting Petroleum (NYSE: WLL) are upstream firms that recently suffered severe debt issues.
- Midstream: Midstream companies are transportation and storage firms. At this part of the process, the raw product needs to be treated, stored and shipped to suppliers. Companies that run pipelines or own oil tankers are often referred to as midstream since they bridge the gap between the drillers and the companies refining and selling the product to the public.
- Downstream: Finally, we have the refiners and suppliers. Downstream companies remove imperfections from the raw product and turn it into engine oil, gasoline, heating oil, etc. Many downstream companies also have operations in the midstream sector as well.
Many of the largest oil companies like ExxonMobil are known as integrated oil producers since they have branches involved in upstream, midstream and downstream operations. When buying oil companies, be sure to understand what sector of the industry they reside in. When prices are as low as they are currently, exploration and drilling companies could struggle under their heavy debt loads.
Best Online Brokers for Oil Stocks
Before investing in any oil stocks, you need to find the right brokerage account for your investments. Most major online discount brokers have access to the oil company shares you’re looking
Intermediate Traders and Investors
Features to Look for in Oil Stocks
- Manageable debt load: Oil companies are usually burdened with large amounts of debt, especially upstream companies that require expensive equipment to operate. Excessive leverage has already caused a few oil companies to fail so far in 2020 and more will follow if prices continue to crash. Debt is a way of life for oil producers, so make sure the companies you buy can manage theirs.
- Stable dividend: Oil stocks are known for their fat dividends and investors have enjoyed steady income from the industry for years. However, with oil stocks in the bargain bin and no end in sight to the headwinds pressuring the industry, dividends are on the chopping block. Energy firms like Williams Companies (NYSE: WMB) currently sport an 8.8% dividend that’s likely to be slashed in the near future. Don’t chase high dividends when the industry is facing this much uncertainty.
- Sufficient cash reserves: Cash is king, especially when an unrelated crisis has driven demand into the ground. The energy sector is going to see some ugliness in the next few months as cash flow dries up, so companies with extra cash to deploy will be better positioned when the crisis subsides.
Trading Oil Stocks During a Price War
There’s no sugarcoating this — oil is a rough trade right now. Prices keep dropping and there’s pressure on the industry from both short-term and long-term headwinds. On April 20th, the price of WTI futures plummeted 40% in overnight trading alone. Renewable energy was gaining traction before the crisis hit and while cheap oil may boost demand once the world gets back to normal, it becomes a tougher and tougher industry to navigate, especially for capital intensive operations in the Upstream sector.
However, it’s hard to resist buying quality companies when prices reach historic lows like these. Buying oil stocks might seem like a bad idea right now, but if demand snaps back sooner than expected, OPEC’s supply limitations could be effective. Oil won’t stay below $20 a barrel forever and many investors will want to buy in now when reputable companies are trading at such steep discounts. Oil is a finicky industry – be sure to do your homework before investing in a sector facing unprecedented uncertainty.