Six Income Investments Offer Ways to Make Big Oil Plays

Six income investments offer ways to make big oil plays as OPEC+ countries choose to cut production to the lowest levels since the start of the COVID-19 pandemic.

The decision triggered an upward move in petroleum prices as Russia President’s Vladimir Putin proceeds with his military invasion of Ukraine by stepping up attacks on the neighboring nation’s power plants, residential areas and civilian population. The 23 oil-producing countries known as OPEC+, heavily swayed by Saudi Arabia and Russia, spurred criticism from President Joe Biden and other leaders in Washington who objected to increased energy prices and their related negative economic impact on consumers and businesses that depend on affordable oil.

Members of the oil-producing OPEC+ bloc defended their move by saying a weakening economy could depress oil demand. Even though the “easy money” for many of the “old energy,” oil-weighted stocks has been earned after a “generational recovery” began in 2020, BofA Global Research wrote in a recent research note that exceptions include the recognition of value through asset quality, growth in sustainable free cash flow or balance sheet rehabilitation.

Despite natural-gas-weighted exploration and production (E&P) oil companies offering the greatest absolute value opportunity in the U.S. energy industry, big oil stocks should benefit from future price increases. Recent intervention by OPEC+ may serve as an early signal of firming oil price support, BofA added.

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Economic Trends Show Inflation Weighing on Markets as Six Income Investments Offer Ways to Make Big Oil Plays

Interest rates are rising rapidly, with mortgage rates close to 7%, according to the Forecasts & Strategies investment newsletter led by Mark Skousen, a presidential fellow in economics at Chapman University. The 10-year Treasury rate is 4.24%, topping the 30-year rate of 4.15% and showing the start of a negative yield curve that is “bad news for the economy,” Skousen wrote in his latest edition.

Mark Skousen, Forecasts & Strategies chief and Ben Franklin scion, meets Paul Dykewicz.

“The Fed is famous for overdoing it, both when fighting recession by sending rates too low and fighting inflation by sending rates too high,” warned Skousen, who also leads the Five Star Trader advisory service that features both stock and option recommendations.

Six Income Investments Offer Ways to Make Big Oil Plays Amid Fed Policies

The U.S. central bank and its monetary policy are largely responsible for the boom-bust cycle in the economy and on Wall Street, Skousen cautioned. The latest employment report was especially robust, adding 263,000 jobs as the unemployment rate fell to a multi-decade low of 3.5%, he added.

“This labor report confirmed what I have been saying with my gross output (GO) statistic, arguing that the United States is not in a recession quite yet, but it’s moving in that direction,” wrote Skousen, a descendent of Benjamin Franklin.

The Fed is seeking to clamp down on high inflation that has topped 8% in the past year. Those who may have trusted the Fed’s previous view that price hikes were “transitory” should note that the U.S. money supply rose 40% during the pandemic. Plus, Social Security payments will rise 8.7% in January 2023, boosting the buying power of 70 million American retirees but exacerbating inflation.

Six Income Investments Offer Ways to Make Big Oil Plays Such as BofA’s Top Pick: ExxonMobil

After a bellwether quarter for both ExxonMobil (NYSE: XOM) and Chevron Corporation (NYSE: CVX), BofA expects the companies to reduce their risk exposure amid a macroeconomic backdrop that is supported by “legacy industry underinvestment.” BofA predicted that sustained OPEC+ intervention, led by Saudi Arabia, will support oil prices.

“With that said, we see the relative investment case for both CVX and XOM diverging — with CVX anchored on legacy capital discipline and portfolio oil leverage, but with momentum swinging behind XOM, as five years of counter-cyclical investment drives divergence in free cash flow,” BofA opined. “While we see greater value with XOM, both names continue to offer low-risk leverage to higher long-term oil prices.

The dominant weight in the S&P energy sector is 1.4% for XOM and 1.0% for CVX, respectively. With both stocks moving quickly towards zero net debt within the next year, based on BofA estimates, the investment firm adjusted its price objectives to $136 per share for ExxonMobil and to $190 per share for Chevron. Those estimates assume BofA commodity team’s projected price of $100 per barrel for Brent in 2023, and a long-term $80 per barrel base case by 2025. 

Chart courtesy of www.stockcharts.com

President Biden recently pledged that the federal government would buy crude oil for the U.S. Strategic Petroleum Reserve (SPR) near $70 a barrel. The move showed bullishness from a “price floor” standpoint, said Jim Woods, who leads the Bullseye Stock Trader advisory service. 

Paul Dykewicz meets with Jim Woods, head of Bullseye Stock Trader.

President Biden’s announcement gave oil traders a new reason to take long positions in the sector, Woods said. For income and share-price momentum, ExxonMobil is an Income Multiplier recommendation in his Intelligence Report investment newsletter.

Chevron Shines as Six Income Investments Offer Ways to Make Big Oil Plays

Both  ExxonMobil and Chevron have reset their balance sheets to step up cash returns, mainly through share buy backs, even though that practice was criticized by President Biden last week as he urged oil companies to reduce prices at the pump. At present, the absolute scale of buy backs is the same for both companies at $15 billion.

In light of their different market values, the per share impact for CVX is about 30% higher than for XOM, but does not reflect buyback capacity, according to BofA. Assuming both management teams maintain buy backs at the current pace, BofA estimates suggest CVX net debt will stabilize at $3-7 billion.

However, with greater cash flow growth from projects secured at the bottom of the cycle, BofA sees XOM’s net cash building to more than $30 billion by 2025 and topping $60 billion by 2030. This is exactly what happened to Chevron with a slowdown in organic spending in 2015 that led to an inflection in free cash flow and significant outperformance compared with ExxonMobil for most of 2016-19. 

Chart courtesy of www.stockcharts.com

ExxonMobil and Chevron Grow Free Cash Flow as Two of Six Income Investments Offering Ways to Make Big Oil Plays

The two stocks have moved together but with growth in free cash flow, which is defined as funds a company can safely invest or distribute to shareholders. The investment firm projects a pending acceleration in free cash flow underpinning an extended period of relative outperformance for XOM, which remains BofA’s top U.S. oil major idea.

In addition, BofA has laid out in multiple reports a view that the long-term oil outlook is resetting after a period of industry underinvestment that “pushed control of oil markets” back toward OPEC+. With sustained intervention, risks to what the market is prepared to discount across the broader oil sector will skew higher, BofA added.

Using the midpoint of the recent trading range for Brent as a benchmark for where Saudi Arabia seemingly intervened to support a price range of $80-$100 per barrel, BofA sees $90 Brent as an upside level that would point to a potential rise of more than 20% for CVX and 30%-plus for XOM.

Marathon Oil’s Acquisition Solidifies its Spot Among Six Income Investments Offering Ways to Make Big Oil Plays

Marathon Oil Corporation (NYSE: MRO) has benefited from a recent rally in the price of oil to become the top commodity recommendation in Skousen’s Five Star Trader advisory service. The company also is growing through acquisition as it announced on Nov. 2 that it entered into a definitive purchase agreement to acquire the Eagle Ford assets of Ensign Natural Resources for $3.0 billion in cash. Marathon Oil’s management announced that it expects the transaction to close by year-end 2022.

The acquisition strikes the right balance between “immediate cash flow accretion” and future development opportunity, said Lee Tillman, Marathon Oil’s chairman, president and chief executive officer. Specifically, it should drive a 17% increase to 2023 operating cash flow and a 15% bump to free cash flow, he added.

Also on Nov. 2, Marathon Oil reported third-quarter 2022 net income of $817 million, or $1.22 per diluted share, including the impact of certain items not typically represented in analysts’ earnings estimates.  The company’s adjusted net income during the third quarter hit $832 million, or $1.24 per diluted share. Its net operating cash flow was $1,556 million, or $1,440 million, before changes in working capital. Free cash flow totaled $1,126 million, or $1,031 million before changes in working capital.

Houston-based Marathon Oil is “dirt cheap,” currently selling for a price-to-earnings (P/E) ratio of 7.45, Skousen wrote. It has a price-to-earnings to growth ratio (PEG) of only 0.61. compared to the U.S. Oil and Gas industry’s 0.51, according to Zacks Research. Anything less than one is considered excellent, Skousen added.

A trailing 12-month (TTM) PEG ratio equals the P/E ratio divided by its growth for the past 12 months. The PEG ratio is aimed at giving an enhanced picture of a company’s prospects than just a P/E ratio alone.

Marathon Oil is up 20.69% since Skousen recommended the position in his Five Star Trader advisory service on Aug. 14. BoA Global Research wrote that risks to Marathon Oil shares include oil and gas prices, a possible correction in refining profit margins, significant delays to the company’s new upstream projects that are critical to its production targets, among other factors.

Chart courtesy of www.stockcharts.com

Shell Joins Six Income Investments Offering Ways to Make Big Oil Plays

Shell plc (NYSE: SHEL), a multinational oil and gas company headquartered in London, England, beat earnings estimates by 5% when reporting quarterly results on Oct. 27. The company’s earnings and production businesses were strong but its liquefied natural gas (LNG) operation, which involves trading, came in slightly weak, said Michelle Connell, who leads Portia Capital Management, of Dallas, Texas.

Connell pointed out a shareholder-noteworthy announcement of a 15% increase in Shell’s dividend that will begin in 2023. It marks a reversal from when the company cut its dividend in 2020 to clean up its liabilities, she added. While the dividend cut initially was viewed negatively, it gave the company room to expand its green energy business, Connell said.

Shell also announced it will begin a $4 billion share buyback. While this is not definitively a signal that the shares are cheap, it telegraphs that the company’s management does not consider the shares “too expensive” at this point, Connell continued. Shell is the world’s fourth-largest oil company in the world, following the largest three: Saudi Aramco, Exxon Mobil and Chevron. Of these four, Connell called Shell the “most environmentally friendly.”

Chart courtesy of www.stockcharts.com

Shell is targeting net-zero emissions by 2050, while Saudi Aramco, Exxon Mobil and Chevron are considered to be “very damaging” to the environment, Connell counseled. Plus, Shell will be building the largest green hydrogen plant in the European Union (EU), Connell added.

“Most oil stocks have appreciated so much this year that it’s difficult to buy them at a discount,” Connell said. “However, Shell is selling at a significant discount to Exxon and some of its competitors.”

For example, Shell’s current price-to-earnings (P/E) ratio is 4.87, while ExxonMobil’s current P/E is 9.07. The difference may stem from Shell’s perception by some investors as a pure European Union play, while ExxonMobil and Chevron are viewed as U.S. energy stocks, Connell said.

Michelle Connell heads Portia Capital Management, of Dallas, Texas.

ConocoPhillips Emerges Upon Six Income Investments Offer Ways to Make Big Oil Plays

BofA’s price objective of $140 per share on ConocoPhillips (NYSAE: COP) assumes $80 Brent and $75 West Texas Intermediate (WTI) long-term prices. The investment firm also assume long-term Henry Hub natural gas at $4.25.

Potential risks to BofA’s price objective are an uncertain oil and gas price and margin environment, significant delays to new upstream projects critical to its production targets and challenges in capturing the price environment due to cost pressures such as operating expenses, capital expenditures and taxation. Outperformance could occur through increased oil prices and cuts to capital expenditures, BofA wrote.

Chart courtesy of www.stockcharts.com

Six Income Investments Offer Ways to Make Big Oil Plays Like XLE 

The largest holding in the Energy Select SPDR (XLE) exchange-traded fund is Exxon Mobil, said Bob Carlson, who leads the Retirement Watch investment newsletter. Carlson, who also serves as a pension fund chairman, added that energy stocks had a strong finish to 2021, and most of the factors that led to those gains have continued so far in 2022.

In addition, inflation is likely to remain high for much of this year and perhaps longer, Carlson continued. Energy stocks traditionally are a good inflation hedge, he added.

XLE is up 78.8 thus far in 2022, as of the close of trading on Nov. 3. Other than its top holding of ExxonMobil, accounting for 22.89% of the fund’s assets, Chevron ranked second, with 19.44%, Schlumberger NV (NYSE: SLB) was a distant third with 4.91% and ConocoPhillips finished fourth with a 4.44% share, as of Nov. 1.

Chart courtesy of www.stockcharts.com

Bivalent COVID-19 Booster Vaccines Could Aid Oil Demand

A new bivalent COVID-19 booster in the United States offers protection against the omicron BA.5 variant, now the predominant strain of the virus. As a resident of Maryland, I arranged to receive the new booster after the state’s health department called me and reported the new booster’s availability at pharmacies near my house.

I received the booster on Oct. 16,  but there still are an additional 200-plus million Americans, who are eligible, but have not yet gained the extra protection. New cases and deaths can hurt supply and demand for oil stocks, so availability of a bivalent booster to enhance the vaccine’s efficacy could help public health and the economy.

Cases in the country totaled 97,691,083 and deaths reached 1,070,138, as of Nov. 4. America has the dubious distinction of amassing the most COVID-19 cases and deaths of any nation. Worldwide COVID-19 deaths totaled 6,597,743, as of Nov. 4, according to Johns Hopkins. Global COVID-19 cases reached 631,804,762.

Roughly 80.2% of the U.S. population, or 266,401,911, have received at least one dose of a COVID-19 vaccine, as of Nov. 2, the CDC reported. People who received the primary COVID-19 doses totaled 227,377,753, or 68.5%, of the U.S. population, according to the CDC. The United States also has given a bivalent COVID-19 booster vaccine to 25,483,818 people who are age 18 and up, accounting for 9.9% of the U.S. population in that age range.

The six income investments offering ways to make big oil plays, as OPEC+ nations cut supply, appear poised for free cash flow growth, even though President Biden blasted their share buybacks. Despite high inflation, Russia’s stepped up shelling against Ukraine and rising recession risk after 0.75% rate hikes by the Fed in June, July, Sept. 21 and Nov. 2, the six income investments still offer ways to make big oil plays

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for multiple-book pricing.