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With Crude at $50 is the Oil Crisis Over? 4 Stock Choices
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Oil prices flirted with the psychologically important $50 per barrel level on Wednesday, the first time since October. West Texas Intermediate crude for July delivery jumped 94 cents, or 1.9%, to settle at $49.56 a barrel in electronic trading yesterday.
Prices Soaring for Several Weeks
Crude prices, which reached $110 per barrel in mid-2014, fell to a 12-year low of $26.21 earlier this year as investors worried about the oversupplied market. The commodity’s collapse has threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer’s profit margins.
However, indications that supply was easing helped oil prices rebound 85% over the past three months. The price gains have boosted shares of companies like Murphy Oil Corp. (MUR - Free Report) and Marathon Oil Corp. (MRO - Free Report) - now up 80% and 70%, respectively, since mid-February.
The surge in benchmark crude is being driven by supply outages in Nigeria, Libya, Venezuela and Canada – countries that hold some of the world’s major sources of crude.
The upward pressure in oil prices also reflect the U.S. Energy Department's recent inventory releases that show crude stockpile builds turning into draws. Things have been further helped by a continued decline in U.S. crude production and drop in oil-directed rigs – indicating a break in shale drilling activities.
Are the Gains Built to Last?
The million dollar question now is whether the rally marks the beginning of a powerful turnaround in oil prices on the back of deep cuts from explorers, or a temporary surge based on optimistic forecasts.
Despite oil’s massive recovery since February, it’s still under $50 – about half the level of two years ago – and far below the breakeven price for many energy companies. Therefore, the commodity is not yet out of the woods and record high inventories amid robust production could still push it to the depths of multiyear lows.
Even the industry, which is cutting deeper, seems to think so. Companies around the world continue to slash jobs, defer/cancel projects worth billions of dollars and renegotiate contracts with suppliers to help protect their balance sheets. For example, Europe’s largest oil company Royal Dutch Shell plc has just vowed to cut another 2,200 jobs to cope with ‘lower for longer oil’.
To sum up, even as crude prices continue to make their way up, world oil supply remains in a glut and is likely to remain so through 2016. This might make any oil price strength short-lived.
Choices for Bargain-Hunting Investors
The uncertainty of oil prices means that the future direction of the commodity’s movement is anybody's guess. However, fundamentals suggest that the odds are firmly stacked against a sustained rally and point toward sideways-to-flat crude price expectation. In fact, some industry observers feel that the door is open for one more retest of the recent multi-year lows.
On the contrary though, the commodity’s recovery to $50, predictably, has had a positive effect on stocks in the sector. In particular, savvy investors might view the price bump as the impetus the stocks need after freefalling for two years. Undoubtedly, still a long way to go, but improving crude prices may have already primed certain oil producers and linked entities for upward momentum.
Here are the Stocks
Selecting stocks to buy could be a tricky proposition, especially with oil prices moving like a roller-coaster. But with the help of our Zacks Stock Screener, one can locate stocks with green shoots. In particular, we have shortlisted 4 companies that have beaten their earnings estimates in the last reported quarter, and have a good Zacks Rank.
Finally, the chosen ones have VGM Score less than or equal to B. Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best upside potential.
World Point Terminals L.P. : St. Louis, MO-based World Point Terminals is involved in operations like development and acquisition of storage terminals for crude oil. Sporting a Zacks Rank #1, the partnership had delivered a positive earnings surprise of 3.85%. World Point Terminals has a VGM Score of B.
Enbridge Inc. (ENB - Free Report) : Based in Calgary, Canada, Enbridge is an energy transportation and distribution company with operations in North America and internationally. In the preceding three-month period, the Zacks Rank #1 stock delivered a positive surprise of 19.57%. Enbridge has a VGM Score of B.
McDermott International Inc. : Incorporated in 1959, Houston, Texas-based McDermott International – holding a Zacks Rank #2 – is an engineering and construction company that serves the worldwide offshore oil and gas field developments. Last quarter, the company delivered an earnings surprise of 1,200%. McDermott has a VGM Score of B.
Murphy USA Inc. (MUSA - Free Report) : Murphy USA is a retailer of gasoline products and convenience store merchandise primarily in the US. In the preceding three-month period, the El Dorado, Arkansas-headquartered Zacks Rank #2 stock delivered a positive surprise of 9.09%. Murphy USA has a VGM Score of A.
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With Crude at $50 is the Oil Crisis Over? 4 Stock Choices
Oil prices flirted with the psychologically important $50 per barrel level on Wednesday, the first time since October. West Texas Intermediate crude for July delivery jumped 94 cents, or 1.9%, to settle at $49.56 a barrel in electronic trading yesterday.
Prices Soaring for Several Weeks
Crude prices, which reached $110 per barrel in mid-2014, fell to a 12-year low of $26.21 earlier this year as investors worried about the oversupplied market. The commodity’s collapse has threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer’s profit margins.
However, indications that supply was easing helped oil prices rebound 85% over the past three months. The price gains have boosted shares of companies like Murphy Oil Corp. (MUR - Free Report) and Marathon Oil Corp. (MRO - Free Report) - now up 80% and 70%, respectively, since mid-February.
The surge in benchmark crude is being driven by supply outages in Nigeria, Libya, Venezuela and Canada – countries that hold some of the world’s major sources of crude.
The upward pressure in oil prices also reflect the U.S. Energy Department's recent inventory releases that show crude stockpile builds turning into draws. Things have been further helped by a continued decline in U.S. crude production and drop in oil-directed rigs – indicating a break in shale drilling activities.
Are the Gains Built to Last?
The million dollar question now is whether the rally marks the beginning of a powerful turnaround in oil prices on the back of deep cuts from explorers, or a temporary surge based on optimistic forecasts.
Despite oil’s massive recovery since February, it’s still under $50 – about half the level of two years ago – and far below the breakeven price for many energy companies. Therefore, the commodity is not yet out of the woods and record high inventories amid robust production could still push it to the depths of multiyear lows.
Even the industry, which is cutting deeper, seems to think so. Companies around the world continue to slash jobs, defer/cancel projects worth billions of dollars and renegotiate contracts with suppliers to help protect their balance sheets. For example, Europe’s largest oil company Royal Dutch Shell plc has just vowed to cut another 2,200 jobs to cope with ‘lower for longer oil’.
To sum up, even as crude prices continue to make their way up, world oil supply remains in a glut and is likely to remain so through 2016. This might make any oil price strength short-lived.
Choices for Bargain-Hunting Investors
The uncertainty of oil prices means that the future direction of the commodity’s movement is anybody's guess. However, fundamentals suggest that the odds are firmly stacked against a sustained rally and point toward sideways-to-flat crude price expectation. In fact, some industry observers feel that the door is open for one more retest of the recent multi-year lows.
On the contrary though, the commodity’s recovery to $50, predictably, has had a positive effect on stocks in the sector. In particular, savvy investors might view the price bump as the impetus the stocks need after freefalling for two years. Undoubtedly, still a long way to go, but improving crude prices may have already primed certain oil producers and linked entities for upward momentum.
Here are the Stocks
Selecting stocks to buy could be a tricky proposition, especially with oil prices moving like a roller-coaster. But with the help of our Zacks Stock Screener, one can locate stocks with green shoots. In particular, we have shortlisted 4 companies that have beaten their earnings estimates in the last reported quarter, and have a good Zacks Rank.
Finally, the chosen ones have VGM Score less than or equal to B. Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best upside potential.
World Point Terminals L.P. : St. Louis, MO-based World Point Terminals is involved in operations like development and acquisition of storage terminals for crude oil. Sporting a Zacks Rank #1, the partnership had delivered a positive earnings surprise of 3.85%. World Point Terminals has a VGM Score of B.
Enbridge Inc. (ENB - Free Report) : Based in Calgary, Canada, Enbridge is an energy transportation and distribution company with operations in North America and internationally. In the preceding three-month period, the Zacks Rank #1 stock delivered a positive surprise of 19.57%. Enbridge has a VGM Score of B.
McDermott International Inc. : Incorporated in 1959, Houston, Texas-based McDermott International – holding a Zacks Rank #2 – is an engineering and construction company that serves the worldwide offshore oil and gas field developments. Last quarter, the company delivered an earnings surprise of 1,200%. McDermott has a VGM Score of B.
Murphy USA Inc. (MUSA - Free Report) : Murphy USA is a retailer of gasoline products and convenience store merchandise primarily in the US. In the preceding three-month period, the El Dorado, Arkansas-headquartered Zacks Rank #2 stock delivered a positive surprise of 9.09%. Murphy USA has a VGM Score of A.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>