Round table of experts: 4 energy stocks benefiting from low oil prices
Low oil prices hurt oil production companies, many of whom spend more on pumping oil than they receive. They are also likely to hurt alternative fuel businesses, which are less attractive when gasoline is cheap. So when oil prices are this low, do anybody to win?
We asked four Motley Fool energy industry contributors if there were any stocks in the sector that would actually benefit from the current situation. They came back with First line (NYSE: BOF), Brookfield Asset Management (NYSE: BAM), Phillips 66 (NYSE: PSX), and Casey’s General Stores (NASDAQ: CASY).
Here’s why they expect these stocks to profit from oil prices at these levels.
A bargain in low oil prices
Travis Hoium (First line) : Soaring oil prices are creating the conditions for a huge windfall for oil companies like Frontline. The company just owns tankers and goes up or down based on the market demanded rate to lease those vessels, and right now they’re in high demand.
The reason oil tankers are in demand is because oil traders and producers are trying to find ways to store oil and are running out of options. A trader could buy a barrel of oil at $ 10.93 with a June 2020 futures contract, then sell oil at $ 21.46 per barrel in August 2020, making a gain of almost 100% in two months! The only problem is that this trader would have to find a place to store this oil for two months. This is where the tankers come in.
Reuters recently reported that 160 million barrels of oil were in tankers stored for future sale at “hopefully” higher prices. This doubled the daily rates of the very large crude oil carriers in one week at the end of March to reach $ 180,000 per day. I wouldn’t be surprised if the prices went up from there. In the short term, this will create a huge windfall for the oil companies.
The problem is that in the long run, the current oil glut could create problems for tankers. If the demand for oil falls permanently, there will be less need for tankers and the industry will be in surplus. In the long run, oil companies aren’t stocks I would buy, but that doesn’t mean they aren’t benefiting from low oil prices right now.
Ready to act
Jason hall (Brookfield Asset Management): One of the best ways to profit from the oil and gas industry is to always have money when others don’t. Brookfield Asset Management manages multi-billion dollar real estate, infrastructure and industrial assets for institutional clients, high net worth individuals and sovereign wealth funds. It also manages several publicly traded partnerships that invest and operate this type of asset.
Brookfield has made a point of always having cash on hand so that it can take advantage of unexpected opportunities, and at this time, in this unprecedented environment, there will likely be many chances of deploying cash in high quality assets at clearance prices.
And while it’s probably not a clearance sale opportunity, Brookfield would lead a group of investors seeks to invest $ 8 billion in a huge gas pipeline owned by the Abu Dhabi National Oil Company in the United Arab Emirates. According to reports, the Brookfield-led group is the latest bidder to come forward for the pipeline, a likely result of collapsing oil prices that pushed other bidders out of the race.
Whether this deal goes through or not, it’s a great reminder that being well capitalized in today’s environment is a very real competitive advantage. Expect Brookfield to be an active participant in the oil and gas market over the next year or so as the assets will be listed for sale at liquidation prices.
The refiner best positioned for low oil prices
Matt DiLallo (Philippe 66): It is difficult to find a energy company which is immune to the impact of low oil prices, because the supply is so overabundant that the industry is lack of space to store all excess crude oil and refined products. However, one company that should benefit from lower oil prices once the industry resolves its current storage issues is refining and logistics giant Phillips 66.
Analysts believe it may be the only refiner to make a profit this year thanks to the strength of its middleman and marketing operations. Bank of America, for example, estimates that these two companies will contribute $ 2.8 billion to cash flow this year thanks to their relative insulation against commodity price risk. The intermediary activity of the company will benefit from storage constraints, as it is building new capacities which will be brought online this year.
During this time, Citi believes Phillips 66 is expected to experience “the strongest profit recovery ramp in 2021” as its refining business begins to thrive on lower oil prices and an expected rebound in demand for refined products. The company has invested heavily in recent years to increase its capacity to process oil produced in North America, which is currently trading at a significant discount compared to crude produced elsewhere. This should prove to be a competitive advantage as it further refines this oil at low cost. This advantage, combined with the fact that shares of Phillips 66 are down about 40% this year, makes it very attractive.
Cheap fuel and pizza too
Jean Bromels (Casey’s General Stores): Despite its name, Casey’s is actually a chain of gas stations. Like other gas stations, it has been hit hard by coronavirus travel restrictions. However, since it does not have refinery operations like many other brands of gas stations (including Phillips 66 and ExxonMobil), it will not have a negative impact on oil prices. In fact, he can actually see a benefit.
Casey’s locations are largely centered in rural areas of the upper Midwest, particularly Iowa, Illinois, and Missouri. This means that there is often limited competition from other gas stations. Casey’s started using price optimization software to adjust fuel prices to maximize revenue. With low oil prices, of course, gas prices are also falling, so Casey’s locations may have more room to increase their margins on gasoline sales. As states begin to ease stay-at-home restrictions – some of which may first be lifted in rural areas – Casey’s is expected to see more traffic.
Like many other gas stations, while the bulk of Casey’s income may come from gasoline, its main profit drivers are convenience store sales, including made-to-order pizzas and sandwiches. Again, since Casey’s operates in rural areas, this is perhaps the most convenient take-out restaurant for many customers. In response to the coronavirus, Casey’s has expanded DoorDash pizza delivery to an additional 579 of its 2,200 locations, expanding its reach even to customers who don’t drive.
The market also clearly likes Casey’s outlook: stocks have only fallen around 2% year-to-date, so it’s not exactly a good deal within the industry. But it is one of the few energy sector stocks who could benefit from low oil prices.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.