4 energy experts break down what's ahead for an oil market in free-fall - including stocks to buy and strategies to deploy
- In interviews with Business Insider and in recent notes to clients, energy sector analysts and strategists broke down where they think investors should put fresh money to work in the space.
- One analyst who expects crude oil to fall further told us she's recommending mid-stream energy names like Magellan Midstream Partners, since that sub-sector tends to be less sensitive to oil prices.
- Visit BI Prime for more investing stories.
The novel coronavirus pandemic that's denting economic growth around the world, coupled with the oil-price war that's broken out between Russia and Saudi Arabia, has struck already-volatile energy stocks with a brutal one-two punch.
In the US, the S&P 500 and Dow Jones Industrial Average have crashed into their fastest bear market on record, nose-diving this month from all-time highs hit just one month ago as COVID-19 has spread internationally. As the S&P 500 has slipped roughly 27% from its recent peak, energy stocks in the benchmark have plummeted a jarring 50%.
The pressure on the energy sector intensified last week when oil prices plummeted 31% in a matter of minutes - the most in nearly three decades - after Saudi Arabia slashed prices in response to Russia's lack of cooperation with OPEC+. That, in turn, sparked a retaliatory measure from oil-rich Russia, which drove prices even lower.
With market forces attacking both supply and demand for oil, the outlook for prices and many energy firms is dim, said Paige Meyer, an equity analyst with CFRA Research. Producers are likely to chop down their capital budgets in response to the dramatic price drop, and demand for transportation and jet fuel is souring during the virus outbreak.
"It's unprecedented," Meyer, who is based in the Maryland area, said by phone.
Not in recent history could she recall a time when oil prices - and, by extension, large-cap energy giants heavily tied to the commodity like Chevron, Exxon, and ConocoPhillips - have faced this kind of downside risk.
But it's exactly these types of historically volatile, uncertain periods that yield diamonds in the rough - as long as an investor knows where to look.
In interviews with Business Insider and in recent notes to clients, energy sector analysts and investment strategists described where investors would be prudent to put money to work in the space - if anywhere at all.
Meyer, who expects oil prices to fall further and is bearish on large-cap energy names like Schlumberger and Transocean, is recommending exposure to mid-stream energy names like Magellan Midstream Partners, Enterprise Product Partners, and Enbridge.
According to Meyer, the sub-sector - comprised of businesses involved in transporting and storing oil and other commodities like natural gas - tends to be somewhat less sensitive to oil -rice fluctuation than big integrated energy names, and will likely see less of a direct impact from plunging oil prices.
Still, shares of Tulsa, Oklahoma-based Magellan, for instance, have collapsed in recent weeks along with many other mid-stream names. Meyer says the group has been unfairly punished during the wider sector sell-off.
Selecting 'best in breed' names, even among the hardest-hit
Some US-based energy companies are already responding to the macroeconomic challenges. After all, the US is the largest consumer of aviation fuel in the world, according to Helima Croft, the head of global commodity strategy and MENA (Middle East and North Africa) research at RBC Capital Markets.
Exxon - based in Irving, Texas - said Monday it would explore "significantly" reducing spending as a result of conditions spurred by the COVID-19 spread and the drop in commodity prices; Exxon shares have dropped 47% this year.
Meanwhile Chesapeake Energy, the Oklahoma City oil and gas exploration and production firm, engaged "debt restructuring advisers amid a rout in energy prices," Reuters reported Monday, citing people familiar with the matter.
Amid the wreckage, investors are broadly bearish on independent refiner stocks, Credit Suisse analyst Manav Gupta said in a note to clients on Monday, and most funds "remain underweight" in those names.
"Investors see demand impact in 2Q 2020 resulting in significantly weaker cracks which will drive negative near-term estimate revisions," Gupta wrote.
The analyst said Phillips 66, the Houston-based diversified energy manufacturing company, and Valero, the San Antonio, Texas-based independent petroleum refiner, are "the only two names in the coverage for which we see some positive traction as relative longs" compared with other refiners and the broader energy sector.
Gupta's team is encouraged that Phillips 66, whose shares have fallen more than 50% this year, is involved in the typically reliable midstream space, and should be able to protect its chunky 7.8% dividend.
Meanwhile Valero has an "excellent" balance sheet, Gupta wrote, and is unlikely to reduce its 10% dividend.
In a survey published Tuesday, Bank of America strategists said investor sentiment around energy had waned among investors they'd polled. A quarter of investors moved to "underweight" energy positions, the lowest reading since oil prices cratered in February 2016.
Broadly, investors should look to names in the energy space that will be able to protect their dividends for shareholders, said Quincy Krosby, the chief market strategist at New Jersey-based Prudential Financial.
Krosby is advising clients to look at big, integrated energy companies - "best in breed" firms, she said by phone - that can maintain their hefty dividends and can "weather the downside" in the wider economic landscape.
Other market participants are waiting to invest in the space as uncertainty lingers around how long it will take for COVID-19 to subside.
"I think as long as we see industrial output decline, we'll see potential further drops in natural gas and oil, hitting energy stocks," Erin Gibbs, the president and chief investment officer of Gibbs Wealth Management, said in an email.
Gibbs, who previously served as the equity chief investment officer of S&P Investment Advisory Services, said she would "like to see positive news on China production levels before jumping in."
On March 2, the National Bureau of Statistics of China said its key manufacturing index fell to the lowest reading since that survey began in 2004.
Get the latest Oil WTI price here.