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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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3 Oil Stocks To Watch This Spring

Oil bulls who have been praying for oil prices to cross the $70 per barrel mark to affirm a full recovery after a very encouraging 6 month-long rally have unfortunately been disappointed. Oil prices seem to have hit a ceiling at the high 60s and are currently flirting with the low 60s with a Covid-19 resurgence raining on the bulls' parade thanks to new lockdowns in key consumer regions such as India and the UK.

Still, the U.S. oil and gas sector remains in good stead; J.P. Morgan has estimated that Permian's Delaware Basin oil drillers now require oil prices of just ~$33/bbl to break even down from $40/bbl in 2019. Indeed, JPM says most U.S. onshore operators are economic at current oil prices, and many operators are even likely to ramp up activity in H2 and build solid momentum for higher volumes in 2022.

U.S. shale producers are likely to increase production in the coming months but will still maintain production discipline and come nowhere near pre-pandemic production levels.

In fact, they could fall short by 7% in the Permian--the largest shale region--and a whopping 26% in the Eagle Ford--the second-largest shale play.

Indeed, Occidental Petroleum (NYSE:OXY) CEO Vicki Hollub recently conceded that returning to production levels of ~13M bbl/day achieved in Q1 2020 requires "too much investment," something the sector can ill-afford under the current circumstances.

And now, OPEC is predicting much stronger oil demand for 2021 ...

Bearing that in mind, here are three oil-related investments that could weather temporary storms better than most ...

#1 Alerian MLP ETF (AMLP)

President Biden's administration is reportedly planning the first major tax increase in nearly three decades in the next economic stimulus package. The president is reportedly planning to include the first major tax hike since 1993 in the next spending bill following the $1.9 trillion coronavirus relief package that Congress has already approved.

In the oil and gas sector, the biggest winner yet in a Biden tax hike though would be Master Limited Partnerships (MLPs), well represented by the Alerian MLP ETF (AMLP), a $4-billion passive fund holding stakes in 19 MLPs.

MLPs are business ventures that operate as publicly traded companies, with the company that manages day-to-day operations being the general partner while the investor acts as a limited partner. The first MLP was formed by shale company Apache Corp. (NYSE:APA) in 1981.

In recent years, MLPs have fallen out of favor after changes were made to the way partnerships are taxed and, perhaps more importantly, due to Trump's tax bonanza.

In 2018, the Federal Energy Regulatory Commission (FERC) reversed a key policy in MLP tax costs for interstate pipelines that led to increased cost of business for some companies.  Related: The World Still Needs Hundreds Of Billions Of Barrels Of Oil

A tax hike could reverse some of the damage and significantly improve the value proposition of MLPs.

According to CreditSights analyst Charles Johnston, Biden's tax plan would increase the tax advantage for MLPs over C-corps from around seven percentage points to 17.

The Alerian MLP ETF offers a yield of around 7% but still appears cheap.

#2 Magellan Midstream Partners (NYSE:MMP)

Yet another MLP, Magellan Midstream Partners, L.P.  (NYSE:MMP) is a Tulsa, Oklahoma-based company that engages in the transportation, storage, and distribution of refined petroleum products.

There are several reasons why this might be a prime holding.

MMP sports a current dividend yield of 9.13%, easily one of the highest in the sector, making it attractive for income investors. The company has ranked at, or near, the top of MLP yields and returns for about two decades, thanks to what Morningstar has attributed to MMP's management quality and capital allocation record.

Further, MMP boasts a BBB+ credit rating or its equivalent from both S&P and Moody's(stable), good for a low default risk of 5%, one of the best in the industry. Related: Oxford Institute: Don't Expect A Supercycle In Oil

MMP is currently trading at under 9x cash flow, with 0.2% CAGR long-term growth chalked in. This essentially means that the stock is unlikely to become a gusher--but also offers pretty decent downside protection.

#3 Marathon Oil (NYSE:MRO)

Marathon Oil Corporation (NYSE:MRO) is an independent E&P company in the United States that engages in the exploration, production, and refining of crude oil and condensate, natural gas, and natural gas liquids. MRO owns the famous Sugarloaf gathering system, a 42-mile natural gas pipeline through Karnes and Atascosa Counties.

MRO stock has enjoyed a massive 161% rally over the past 12 months and 61% in the year-to-date thanks to massive improvements in crack spreads. Crack spreads have nearly doubled from $12 per barrel six months ago to $23 currently.

Crack spreads refer to the overall price differential between the price of a barrel of crude oil and the price of petroleum products refined from it.  The "crack" is an industry term that refers to the process of breaking apart crude oil into different components, including gaseous products like propane, heating fuel, gasoline, light distillates like jet fuel, heavy distillates like grease and intermediate distillates like diesel fuel.

MRO has been able to benefit from the rebound thanks to the company's efficient operations, low breakeven prices, and healthy free cash flow. This is a stock that could still see impressive upside should oil prices continue to rally to $70-$75.

By Alex Kimani for Oilprice.com

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