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Arguments

Arguments

Wondering why investing in Oil stocks are worth your time, here we compiled some of the key Arguments for Oil Stocks,

Low / recovering Oil Price

The Oil Price is coming from its 2016 low of 29 US$ and is now in the range of 60 US$ still 100% off the 2010 – 2014 highs of up to 111 US$. The low price era late 2015 to mid 2016 has cleared the market of companies that were not efficient enough to operate profitably at these levels.

The world bank forecasts rising Oil Prices towards 80 US$ in the coming decade. That is of course taking into account a evenly forecasted oil consumption and does not consider sudden events such as geopolitical tensions that can drive oil prices sharply higher. Oil Stocks are usually lagging the movement of the Oil Price, so the 20 US$ Oil Price rise we have seen in late 2017 is not yet full reflected in the Oil Stocks pricing.

 

 

Oil consumption will be strong despite rise in electric cars

A logical con to oil consumption appears to be the shift to electric cars that is taking up great momentum after year of slow adoption not at last due to diesel emission scandals.

However, where does the energy for powering electric cars come from? from plants generating energy by burning coal, natural gas, nuclear power and renewable sources such as wind power and solar. In 2013 about 22% of all energy produced came from renewable sources reaching 26% by 2020. While electric cars will replace fossile burners eventually, this process will not be sudden, in the realm of air transportation no alternative to jet fuel is in sight yet.

 

High Dividends

Many Oil & Gas Stocks attain a high regular dividend yield in a far field starting at 3% up to 15%. Usually the bigger the name the smaller the yield since the big 4 oil companues are on a high price level

Dividend yields in the Oil & Gas sector are substantially higher than in other sectors compared to the current  dividend yield of only 1.93% in the S&P 500. Dividend dynamic is helped by comparably high stock price volatilty. Especially the Midstream sector stands out for high dividiend yield.

 

Oil stocks are good value right now

 The S&P Energy index contracted by 15% YTD 2017.
Some Oil stocks have fallen up to 50% in 2017 and touched new 52-week lows.

Due to the 2015/2016 lows the number of oil firms reduced greatly which resulted in far less exploration projects and reduced competition.

Porta Avisors via CNBC on oil stocks:

While the global oversupply of oil continues to weigh on crude prices and suppressed stock prices for oil companies, the sector offers attractive value to investors, experts argue.

“The sector has been underperforming, there’s great value, so you have to play the sector,” Beat Wittmann, partner at Swiss financial advisory Porta Advisors, told CNBC’s Squawk Box on Wednesday.

“The sector is so attractive right now and it’s a global demand-supply game.”

Oil sector is looking attractive for investors, say experts from CNBC.

Fortune Magazines’ Jen Wieczner in his article  quotes Andy Goldberg, global head of investment strategy for J.P. Morgan 

“Energy companies’ results have beaten expectations by an average of 22% so far this year. That represents “a huge opportunity for energy right now,” . “The market is pricing in more bad news for the sector than actually exists.”

Oil is on a bull run /  mainstream media attention is back

The late 2017 increase from 40US$ to 65US$ catched the attention of investment manager and media alike. For years oil was out of favor and shunned for shiny tec stocks that got all the attention however the passion for tec stocks is fading. Sector rotation is underway. Oil and the wider energy stocks sector is back for growth and oil stocks are still way undervalued.

A testament of how attention has changed favourably towards Oil is this outlook on oil stocks published by Jim Collins at Forbes:

“Simply put, I believe energy is the new Nasdaq. The astronomical returns in 2017 from megacaps like Facebook, Apple, Amazon, Netflix and Google (Alphabet)–which are simply staggering in sheer dollar terms–can and will be replicated among oil producers. The little guys will move first  Higher global prices for oil–watch for a move upward in natural gas pricing, as well–will be the tailwind that drives energy stocks to outperformance next year ( Text quoted from Forbes Article )

Morgan Stanley’s chief U.S. equity strategist Mike Wilson likewise sees potential in oil stocks for 2018 in the end of year outlook interview at Bloomberg 

Zacks Research Ryan McQueeney writes to the same theme in his article Will Oil and Energy Stocks Dominate the Market in 2018? To date, the energy sector has gained a measly 1.84% in 2017, and that includes a strong surge over the past month. Based on the latest momentum and earnings outlook, it is hard to imagine this sluggishness continuing into the New Year, especially considering the market-wide desire to explore non-tech options have started to see.

High Volatility 

Oil Stocks tend to move more than some other sectors tied to the constant change of the oil price and political developments. Higher volatility means more trading opportunities.

Oil is scarce / Peak Oil

Back in the 1950’s King Hubbert forecasted the peak of oil production to occur in 1995. Due to new sources of oil such as fracking and oil sands that forecast did not validate.

Oil still is a scarce resource and many of the new sources of oil are very costly (e.g. fracking has a break-even of 40 US$) which in turn means Oil oversupply is highly depending on the price level.

Political changes

Political changes direct impact on the Oil Price. Examples of political changs that where Oil Price moving in 2017 was the more industry and less environmental policy of the Trump Administration taking effect in 2017 and more recent the Saudia Arabia Leadership shake-up.

 

If you want to start investing in Oil or get a broader idea of all the interesting players in the energy market, get the Oil Stocks report with for an 2017 introductionary price of 29 EUR.

 

 

 

 

 

August 11, 2017