Are you looking for a contrarian stock play? Try big energy – fossil fuels, to be specific.
Crude oil prices have increased drastically in the last two and a half months due to supply cuts and increasing demand. Meanwhile, redlining by banks – more on that later – points to a particular advantage for the biggest industry players.
First, let’s review what’s happening with the object. Here is a chart showing the movement of continuous month futures contracts for West Texas crude oil (WTI) since late 2013:
Here is the action from the end of October:
This is a 51% jump in 2½ months.
Investors believe in the rally. Here’s how the S&P 500 Index SPX has 11 sectors.
The data for the first period, along with the largest US stocks made during the first half of January:
Kovid-19 vaccines give hope that the world may return to a normal economic development path, perhaps later in 2021. However, a winter spike in coronovirus cases has led the International Energy Agency to cut its demand for 2021. Then, the IEA report was published on Tuesday, and the WTI CLG21 for February delivery,
Was 1.3% for the day.
Sure, it is easy to give up on oil. The short-term path to oil and natural gas reserves can be stony from here – until the epidemic ends. And for a very long time, the increased use of electric vehicles is not good for gasoline demand.
But all the electricity needed for the new power fleet has to come from somewhere, including power plants that use fossil fuels. Oil and natural gas producers will continue to fuel heavy vehicles, aircraft and ships.
A new form of redlining
It is illegal to reduce the old practice of some banks to avoid lending to entire sectors. But in the world of ESG investment – which stands for environmental, social and governance – companies are trying to ensure that investors believe they are doing everything they can to protect themselves from the environment-harming activity Can avoid, while also improving society in various ways.
It has led to several large US banks, including Morgan Stanley M.S.
Wells Fargo & Company WFC,
Goldman Sachs Group Inc. Gs,
JPMorgan Chase & Co. JPM,
And more recently Bank of America Corp. BAC,
To decide not to provide financial support to the activities of oil drillers at the Arctic National Wildlife Refuge (ANWR) in Alaska.
The Biden administration may seek to reverse President Trump’s decision to open drilling in the ANWR. But this does not mean that the big banks will not miss lending to oil companies drilling in other areas.
On January 15, Phil Flynn, a senior market analyst at Price Futures Group, wrote in his daily energy report that small shale-oil producers would suffer the expense of banks’ reluctance to lend to the industry.
“In other words, more derivative ‘Big Oil’ companies will grow bigger and stronger, while smaller independents will crack under the weight of more regulations and have an inability to secure capital,” he wrote.
Wall Street’s favorite oil stock
So what does this mean to investors? You have items – oil and natural gas – that are under great pressure. The price of crude oil is less than half which was not so long ago. Meanwhile, US shale makers faced long odds against breaking even last year. Looking ahead, the OPEC nation and Russia are motivated to keep prices high by managing supply.
When the epidemic finally ends, an indifferent response in the market can send oil rising even above current levels. Continued economic growth may also support higher prices.
Looking at the S&P 500, there are 25 energy stocks. Here are all of them, ranked based on a percentage of “buy” or equivalent rating from Wall Street analysts. The table includes consensus price targets.
There is too much data in the table – you have to scroll to see it.
In addition to rating information, there are 12-month price targets. Some targets are not much higher than current share prices, even for companies with the most “buy” or equivalent ratings. One year may not be sufficient for a price target for a long-term investor, especially when looking at a commodity-dependent game, at the end of the epidemic.
Dividend yields are included in the table. Exxon Mobil Corporation shares of XOM,
A yield facility of 7.27%. The company has surprised at least some investors that its dividend was not cut during the epidemic, even when oil prices were very low. Exxon’s rival Chevron Corp CVX,
A very low ratio of long-term debt to equity (right-most column on the chart) – 5.60% – also plays an attractive dividend yield.