It’s a good time to look at energy stocks again, now that oil prices have rallied in Monday's session after Saudi Arabia pledged big production cuts and OPEC+ extended its existing cuts to 2024.
Saudi Energy Minister Prince Abdulaziz said the country would cut another 1 million barrels per day with its output dropping to 9 million barrels per day in July, the lowest level in years. The pledges have come barely a week after Prince Abdulaziz warned speculators and short sellers they could soon find themselves in a world of pain. Rampant short-selling has also been putting a lot of pressure on the oil markets, with commodity experts at Standard Chartered reporting that speculative positioning in crude oil has now returned to its March bearish extreme despite the OPEC+ cuts taking effect in May.
Oil futures have generally been bearish over the past couple of months despite the physical markets remaining in relatively good shape. But the shorts were in for another big short squeeze, with Saudi Arabia and OPEC+ no longer interested in staying in Washington’s good books and willing to do anything in their power to keep oil prices high.
"Speculators, like in any market they are there to stay, I keep advising them that they will be ouching, they did ouch in April, I don't have to show my cards I'm not a poker player... but I would just tell them watch out," Saudi Energy Minister Abdulaziz bin Salman said on Wednesday as quoted by Reuters.
The Biden administration has also been frustrated by the inability or unwillingness by domestic producers to ramp up production in a bid to lower fuel prices. U.S. shale producers have opted to return excess cash to shareholders instead of drilling more. The much-touted second shale boom has lately been getting a reality check as equipment demand declines sharply, a worrying sign that drilling in U.S. shale energy regions is leveling off. The Financial Times has reported that next week, Texas auctioneer Kruse Asset Management will auction off two unused, top-of-the-line drilling rigs valued at $40 million and $30 million when built in 2019 at starting bids of just $12.9M and $2.3M, respectively. Related: Saudi Arabia Raises Arab Light Prices For Asia
“There’s no reason for them to be so cheap, but there’s just no demand,” Dan Kruse, chief executive of Kruse Asset Management, has told the Financial Times.
After a dizzying run in 2022, oil stocks have lagged badly in the current year with the sector’s key benchmark the Energy Select Sector SPDR Fund (NYSEARCA:XLE) down 5.7% in the year-to-date compared to a 12.4% gain by the S&P 500. Luckily for the bulls, oil experts remain bullish, with many predicting oil prices above $80 a barrel over the coming years--well above the $58-a-barrel average price between 2015 and 2021. Here are three energy stocks to play the coming rally.
- Brookfield Renewable Partners L.P.
Market Cap: $14.9B
YTD Returns: 21.9%
Brookfield Renewable Partners L.P. (NYSE:BEP) owns a portfolio of renewable power generating facilities primarily in North America. The company’s impressive portfolio of renewable energy assets has been helping the company maintain decent growth.
With more money set to flow into the solar sector than the oil sector in the current year, renewable energy companies with large solar portfolios like Brookfield have been surging.
In its latest results, Brookfield Renewable reported Q1 revenue of $1.33B (+16.7% Y/Y), beating the Wall Street consensus by $50M while Q1 FFO of $0.43 beat by $0.02. Better still, the company could continue to exceed expectations,"We acquired a scarce platform which we know well and remains well-positioned to continue to deliver returns within or above our target range. Based on our acquisition price for the remaining 50%, which we expect will deliver mid-to-high teen returns, our initial investment has generated an IRR of almost 30% and over two times invested capital in our three years of ownership," the company’s management said during its earnings call.
BEP is one of the few renewable energy companies that pay a dividend, with the yield currently at 4.3%.
- Chevron Corp.
Market Cap: $296.1B
YTD Returns: -10.2%
Chevron Corp. (NYSE:CVX) has come into the limelight after its merger with PDC Energy in an all-stock transaction valued at $6.3 billion earned it a flurry of upgrades.
RBC Capital has upgraded CVX to Outperform from Sector Perform with a $180 price target, raised from $165 after Chevron shares underperformed ExxonMobil Corp.(NYSE:XOM) by more than 30% since the beginning of 2023. According to RBC Capital's Biraj Borkhataria, Chevron's "defensiveness" has been viewed negatively in bullish commodity markets while well productivity issues in the Permian Basin have also been weighed on sentiment. However, the analyst says the company’s upstream heavy weighting combined with its strong balance sheet as well as a commitment to capital discipline make the company well placed to weather markt malaise.
The upgrade came a day after J.P. Morgan upgraded the stock to Buy, with the Wall Street bank saying that "defensive characteristics" make CVX well positioned for economic uncertainty.
- Devon Energy Corp.
Market Cap: $31.1B
YTD Returns: -15.5%
Hedging is a popular trading strategy frequently used by oil and gas producers, airlines, and other heavy consumers of energy commodities to protect themselves against market fluctuations. During times of falling crude prices, oil producers normally use a short hedge to lock in oil prices if they believe prices are likely to go even lower in the future. Last year, with oil and gas prices hitting multi-year highs, producers that typically lock up prices preferred to hedge only lightly, or not at all, to avoid leaving money on the table if crude continued to soar.
The same thing is happening this year, with hedge ratios remaining low. Indeed, some Big Oil companies are so confident that high oil prices are here to stay that they have completely ditched their hedges, with Devon Energy Corp. (NYSE: DVN) one of them. Devon Energy Corp. is only about 20% hedged, way lower than the company’s ~50% normally. The company is, therefore, well set to capture any run-up in prices, which should help this stock rally during the second half of the year.
By Alex Kimani for Oilprice.com
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