Building on the sector's second annual gain in a row, energy stocks have witnessed a solid start to 2018 and look poised to continue climbing in the coming months.
Just a few months ago, or until September last year, the commodity had a very difficult year. In June 2017, U.S. West Texas Intermediate (WTI) fell to nearly $42 a barrel - the lowest in ten months. Since then, the contract has risen more than 50%. In fact, WTI hit a more than three-year high of around $66 recently.
Unlike other short-lived rallies over the past three years, we believe the current higher oil prices are a result of improving fundamentals. Declining inventories and the extension of OPEC-led supply cuts until the end of 2018 are the two major factors helping to balance the market and support the strong uptrend.
Production Cut Deal Extension
One of the significant reasons why the U.S. oil benchmark soared, revolves around the expansion of the output-cut deal between OPEC and other major producers beyond March. True to predictions, the coalition prolonged the current dynamic for another nine months to the end of 2018.
The agreement, now renewed twice, keeps 1.8 million barrels a day (or 2% of global supply) off the market in an attempt to clear a supply glut. While there are several question marks over the degree to which the cartel members are adhering to their quotas, there's no ignoring the fact that the cuts continue to narrow the market imbalances.
Sharp Inventory Drawdowns
Investors have pinned hopes of recovery over the U.S. Energy Department's inventory releases that show multiple weeks of strong inventory draws in the domestic crude stockpiles – pointing to a slowdown in shale output. Oil stockpiles have shrunk in 34 of the last 42 weeks and are down almost 114 million barrels since April. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 411.6 million barrels, current crude supplies are 15.7% below the year-ago period and the lowest since February 2015.
Investors Bet on a Sustained Rise in the Price of WTI crude
Currently at around $63 a barrel, the price of oil has more than doubled from the multi-year lows of early last year and it’s a whole new ballgame for investors who are now the most optimistic on the commodity than at any time in the past three years. They believe that the OPEC and Russian agreement will help whittle down huge global stockpiles and lead to even higher prices in the near-term.
Strong Oil Market Supported by a Robust U.S. Macro Economy
Notwithstanding recent hiccups, U.S. stock markets have hitting all-time highs on a regular basis. Stocks have mostly rallied since last year’s election, with a booming U.S. economy, supportive monetary policy and robust corporate earnings being the key triggers. Expectations that the Trump administration’s proposed tax and regulatory reforms will help companies’ and consumers, have given investors further reasons to put their money in stocks.
Improving Cash Flows Prompt Oil Companies to Reward Shareholders
As low oil prices over the past three years weighed on the energy companies' top and bottom lines, the industry was forced to chalk out new strategies and resort to dividend cuts and cost-reduction initiatives to shore up cash flows. The downturn not only impacted the smaller and the more-leveraged companies, it also affected the fairly larger companies (generally considered safe haven investments). They were forced to cut or suspend cash dividend and share buyback programs.
Thanks to rebounding oil prices and strategic initiatives, most of the energy firms have finally managed to successfully come out of the slump. A stable floor under crude price, together with lower operating expenses not only helped boost profits but also encouraged a number of companies to raise dividend payouts.
How to Pick the Right Stocks?
With a host of oil producers raising payout of late, It is no easy task to select outperformers. Therefore, we are using the Zacks Rank to zero in on companies with strong fundamentals.
To guide investors to the right picks, we highlight four energy stocks that carry a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Finally, the chosen ones have recently announced another increase in their payouts to shareholders.
Statoil ASA : Statoil ASA is a Norway-based major international integrated oil and gas company. This Zacks Rank #1 company has operations in all major hydrocarbon-producing regions of the world, it has an upstream focus on the Norwegian Continental Shelf.
Statoil raised its quarterly dividend by 4.5% on Wednesday, to 23 cents a share.
Pioneer Natural Resources Company (PXD - Free Report) : Irving, TX-based Pioneer Natural Resources Company is an independent oil and gas exploration and production company, the asset base of which is anchored by the Spraberry oil field located in West Texas, the Hugoton gas field in Southwest Kansas and the West Panhandle gas field in Texas Panhandle.
The company – carrying a Zacks Rank of 1 – not only posted a comprehensive fourth-quarter beat but also declared a semi-annual dividend of 16 cents per share, or 32 cents annualized. This is a fourfold increase from the prior dividend of 4 cents.
Marathon Petroleum Corp. (MPC - Free Report) : Findlay, OH-based Marathon Petroleum is a leading independent refiner, transporter and marketer of petroleum products. The company also as a Zacks Rank #1.
The company, which last week reported strong fourth-quarter 2017 results on higher refining margin, recently approved a 15% hike in its quarterly dividend. Marathon will now reward shareholders with a dividend of 46 cents per share compared with 40 cents earlier. This translates to an annualized dividend of $1.84 per share.
Cabot Oil & Gas Corp. (COG - Free Report) : Cabot Oil and Gas, based in Houston, TX, is an independent oil and gas exploration company with producing properties mainly in the continental U.S.
Earlier this year, the Zacks #1 Ranked company declared a quarterly dividend of 6 cents per share, or 24 cents annualized. This is a 20% increase from the prior dividend of 5 cents.
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