The collapse of oil prices picked up in 2016 where it left off in 2015. However, there are increasing signs that the worst for oil prices may be over. In fact, since falling below US$28 earlier this year, the price for a barrel of Brent crude oil, an oil benchmark, has already clawed back up above US$40 by the second week of March and has stayed in that range since, beating Morgan Stanley's forecast of US$30 a barrel for 2016 by a considerable margin.
It remains to be seen if the current momentum in oil prices will sustain, but so far things are looking good. At the upcoming April 17 meeting in Qatar, members of the Organization of the Petroleum Exporting Countries (OPEC) and other leading oil producers are expected to agree to a freeze on oil output.
As well, declining oil production in the United States and disruptions in Iraq, Nigeria and the United Arab Emirates have served to tighten supply and lift crude prices. These developments have prompted the International Energy Agency to conclude that oil "prices might have bottomed out."
The turnaround, however, does not appear to be fully captured yet by the S&P GSCI Crude Oil Index and the Dow Jones Commodity Index Crude Oil, both of which have posted one-year losses of nearly 40%. Now may be a good time, therefore, to keep on your radar screen select oil stocks that may prove to be attractive buys when the global oil market rebalances itself, paving the way for the inevitable recovery in oil prices.
| Marathon Petroleum Corp. | ||
| Ticker | MPC | |
| Current yield | 3.27% | |
| Forward P/E | 6.5 | |
| Price | US$36.98 | |
| Fair value | US$56 | |
| Data as of Mar. 28, 2016 | ||
Marathon Petroleum (MPC) operates seven refineries in the mid-continent oil field and on the Gulf Coast of the United States, and owns and operates crude oil and refined product pipelines.
"Its existing refining asset base is well positioned to capitalize on the ever-changing domestic crude market," said Morningstar sector strategist Allen Good in a report, noting that the firm is also "investing to expand its midstream and retail businesses in an effort to diversify its earnings stream away from the more volatile refining business."
In the near term, though, the refining segment will still largely determine Marathon's profitability, said Good, who considered this "as a positive," given the "outlook for U.S. refining over the next five years and Marathon's competitive position."
The acquisition of the Texas City refinery from BP transforms Marathon into primarily a Gulf Coast refiner (62% of capacity in the region) while reducing its reliance on mid-continent refining, which has been the main driver of earnings over the past few years.
Good projected stronger margins and improved crude discounts in both regions. The that the firm is solely exposed to the mid-continent and Gulf Coast "results in greater profitability and leaves it better positioned to capitalize on [oil price] differentials compared with more geographically diversified peers," said Good, who pegged the stock's worth at US$56.
| Exxon Mobil Corporation. | ||
| Ticker | XOM | |
| Current yield | 3.47% | |
| Forward P/E | 20.7 | |
| Price | US$84.22 | |
| Fair value | US$92 | |
| Data as of Mar. 28, 2016 | ||
An integrated oil and gas company, ExxonMobil (XOM) explores, produces and refines oil globally. The world's largest refiner stuck to its fundamental strengths to perform better than its competition despite the 70% decline in oil prices since 2014. "Exxon has demonstrated with decades of peer-leading returns a focus on cost control, on-time project delivery, value over volume and disciplined capital allocation," Good said in a Morningstar report.
When combined with high-quality assets, the firm's disciplined approach helps maintain a sustainable competitive advantage, or a wide moat, despite a prolonged weakness in oil prices, the report noted.
"In keeping with its focus on capital discipline, the decline in oil prices has prompted Exxon to curtail investment in order to protect returns on capital and ensure adequate dividend coverage," said Good, who recently upped the stock's fair value from US$87 to US$92, responding to the recent bounce in oil prices.
Good forecasted Exxon to continue to deliver higher returns and wider margins relative to peers for the next five years based on superior capital allocation, and integration between refining and chemical manufacturing.
In addition, nearly all of Exxon's new production capacity by 2018 will be in oil and gas liquids, rather than natural gas, leaving Exxon in a better position to capitalize on higher oil prices, Good added.
| Whiting Petroleum Corp. | ||
| Ticker | WLL | |
| Current yield | - | |
| Forward P/E | - | |
| Price | US$7.34 | |
| Fair value | US$20 | |
| Data as of Mar. 28, 2016 | ||
Whiting Petroleum (WLL) is an independent oil and natural gas company operating primarily in North Dakota, Montana, Colorado and Texas. Oil represented approximately 75% of reserves and production in 2015.
"Whiting represents a high-beta play on a recovery in oil prices, with significant stock price appreciation potential if longer-term prices get above US$60," said Morningstar strategist Mark Hanson in a report. The firm's sizeable inventory, established base of long-lived enhanced oil recovery (EOR) production, attractive oil/gas mix and better-than-average cost structure should support several more years of profitable growth, said Hanson, who appraised the stock's worth at US$20.
"Whiting's longstanding presence in the [Williston] Basin places it further along the learning curve than many of its peers," Hanson said. "Recent efforts to curb operating costs and stretch capital dollars leave Whiting well positioned to ride out an extended period of weak oil pricing while preserving cash flow and maintaining debt at or below current levels."
The company's recent acquisition of Kodiak Oil & Gas--which added nearly 2,100 drilling locations--and its expansion into the Denver-Julesburg Basin in Colorado have fortified its potential for greater organic growth when oil prices recover. It is also temporarily suspending its well-completion activity during the second half of 2016 to ride out oil price weakness, Hanson added.
| Chevron Corp. | ||
| Ticker | CVX | |
| Current yield | 4.52% | |
| Forward P/E | 22.2 | |
| Price | US$94.68 | |
| Fair value | US$111 | |
| Data as of Mar. 28, 2016 | ||
Chevron Corp. (CVX) is the second-largest oil company in the United States, with exploration, production and refining operations around the world.
The firm's oil portfolio, which has helped generate industry-leading margins and returns on capital in recent years, is projected by Morningstar to provide stronger growth than its peers from 2015 through 2018. New production from the Permian Basin, Gulf of Mexico, West Africa, Western Australia and the Gulf of Thailand will preserve its exposure to oil-and-gas liquids prices and serve as the growth engine for Chevron in years to come, Good said in a Morningstar report.
Improving oil prices, cost-cutting and increased production could boost cash flow over the next five years. The company is investing in shorter-cycle, less capital-intensive projects, while expanding existing projects, which could deliver the next stage of production growth.
A combination of lower capital spending and higher oil prices created a bright outlook which led Good to raise the stock's fair value from US$102 to US$111. "Chevron's production growth should accelerate in the coming years thanks to the start-up of LNG (liquefied natural gas) and offshore projects," he said, but cautioned that "a significant portion of these volumes will be LNG, whose pricing is linked to oil."
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