Are oil stocks recession-proof investments?

Posted: 29 April 2022 4:38 pm
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Oilfield stocks including Exxon. Chevron and Schlumberger have benefited as sanctions against Russia pushed oil prices higher. Analysts recommend buying the stocks to share in the windfall.

Recession worries are mounting after preliminary data showed growth slowed in the euro area in the first quarter. Big tech joined the chorus of companies flagging supply chain issues and rising costs, adding to market anxiety.
If you’re one of those googling recession-proof investments, you may have come across oil stocks and seen how the energy sector has posted gains of more than 50% in the past year. The first-quarter results from Exxon (XOM) and Chevron (CVX) just out today signal the party may just be getting started, despite the price dip both are seeing at this writing.
Let’s take a look at what’s driving the optimism.

Inflation, sanctions and a recession?

Fears of an economic slowdown, or worse, a recession, are fueled by surging consumer prices and expectations that the Federal Reserve will aggressively raise interest rates in the US to curb inflation. While supply chain disruptions caused by the global pandemic were the initial culprit, Russia’s invasion of Ukraine added to price pressures. Sanctions against President Vladimir Putin, his government and oligarchs threatened to isolate Russian shipments, worsening an already precarious supply situation for oil (and several other commodities).
These concerns drove crude oil futures above $120 a barrel in New York in March. While prices have since fallen, they still stand at more than $100 compared with about $60 a year ago.

Supply may not meet demand

The growing popularity of renewable energy in the US and Europe has discouraged new development in fossil fuels. Production of crude oil has struggled to keep pace with demand. And that was the case even before supply from Russia was threatened as a result of the sanctions.
Global liquid fuel production is expected to rise to 100.2 million barrels per day this year, according to the US Energy Information Administration’s short-term energy outlook in early April. That leaves little wiggle room for disruption like outages in a market where consumption is forecast to reach 99.8 million barrels per day.
EIA’s supply forecast includes 10.4 million barrels per day from Russia. Speculation is mounting that the European Union will ban those shipments, sending traders scrambling to find alternative suppliers.
That has kept prices elevated even amid concerns that demand from China would weaken as Covid lockdowns there widen. China is the second-largest energy consumer, behind the US.

Worsening oil supply situation

JPMorgan analysts expect the global energy market to see a supply gap of 500,000 barrels per day this year. The situation could deteriorate further. Russia’s oil production may shrink as much as 17% this year amid restrictions on the nation’s crude shipments, Bloomberg reported, citing Finance Minister Anton Siluanov.
Before earnings were released, JPMorgan analysts were already expecting the big oil majors to deliver a dividend yield of 4% this year and next, according to their report dated April 20. Exxon and Chevron first-quarter results support that view.
Brent crude, the global benchmark, is expected to average $108 a barrel in the second quarter before declining to $102 in the second half of the year, according to the EIA’s short-term outlook released in early April.
Exxon generated $14.8 billion of cash flow from operating activities in the first quarter, more than enough to cover capital investment and shareholder distributions. Investors can expect to further benefit from the windfall after the company tripled its share buyback program to $30 billion.

Does that make Exxon a buy?

The number of analysts with a buy recommendation on Exxon has risen to 12 from 9 three months ago, according to data on the Wall Street Journal website. Two have an overweight rating, meaning the stock should have a higher weighting in an investor’s portfolio, compared with the company’s allocation in an index like the S&P 500. Sixteen are recommending that shareholders hold on to their stake.
See how Exxon has performed longer term with our dedicated guide.

Is Chevron a buy?

Analysts’ average target price on the stock is $96.90, representing further upside for a company that has already seen its shares climb about 42% this year to $85.49 at 2:53 p.m. in New York.
Chevron’s financial health is just as healthy. The oil producer posted the highest quarterly earnings in almost a decade. Cash flow from operations almost doubled to $8.1 billion compared to $4.2 billion a year earlier, it said in a press release.

Analysts’ average target price for Chevron is $180.38, representing more upside for shares that are currently trading at $161.79 after a 34% advance this year. Eighteen out of 31 analysts who track the stock have either a buy or overweight rating on the stock, according to the WSJ website. Twelve have a hold recommendation, while one says sell.
To see Chevron’s five-year performance, visit our dedicated guide.
The global supply situation isn’t expected to meaningfully improve soon. Oil and gas investment will need to rise to $525 billion by 2030, from $341 billion last year, to restore market balance, according to a report by the International Energy Forum and IHS Markit.
As the supply gap brings more cash windfall for oil producers, it will also spur business activity for hired hands like oil service giant Schlumberger. Companies are expected to ramp up output to benefit from higher prices.

What about the oil services firms?

Schlumberger’s CEO Olivier Le Peuch already sees signs of increased activity. “The confluence of elevated commodity prices, demand-led activity growth and energy security are resulting in one of the strongest outlooks for the energy services industry in recent times,” he said in the company’s earnings release.
The company reported earnings last week, beating expectations and raising its dividend.
“The dislocation of supply flows from Russia will result in increased global investment across geographies and the entire energy value chain to ensure the diversification and security of the world’s energy supply,” Schlumberger’s CEO said.
The company’s fortunes are largely driven by capital expenditures of international oil producers, with North American customers serving as a second catalyst, CFRA equity analyst Stewart Glickman said in a note on April 23.
“In both areas, we think we are in the early innings of a recovery,” Glickman said. “We caution investors that the oilfield services industry still has a very long way to go to return to the high-water mark of spending.”

Is Schlumberger a buy, or are you too late to the party?

Schlumberger shares have rallied 30% this year, and analysts are expecting more gains. Twenty-eight of 32 analysts who track the stock have either a buy or an overweight recommendation on the stock, while four have hold. Their average target price is $49.53, signaling more gains for the stock that traded at $38.94 Friday afternoon.
While oil-related stocks are expected to outperform the broader market, that’s not to say they are immune to the negative sentiment that has plagued investors. For those investing with a time horizon stretching a few years, a dip in prices like the one in the three stocks discussed in this article today could be a good opportunity to add them to your portfolio.
For more on buying oilfield stocks, read our dedicated guide.

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