Stocks to Play Rising Oil Prices

Oil markets have been on a tear, bouncing back from the depths of the 2020 slump. And while the increased gas prices at the pump have caused consumers considerable pain, rising prices are a net positive for oil producers and those invested in their stocks.

The International Energy Agency (IEA) forecasts continued strong growth in demand for the rest of the year, leading to a rise of 1.5 million barrels per day in global oil output in Q4 of 2021, with the U.S. alone contributing 400,000 barrels to this growth.

Stronger oil prices and spiking demand have prompted large oil producers to crank up production. The following heavyweights are well-positioned to ride the growth tailwind created by the changing fortunes of the oil industry.

Integrated oil and gas giant, ExxonMobil (XOM) produces oil globally, is the world's largest refiner as well as one of the largest manufacturers of commodity and specialty chemicals.

At a time when many of its peers are diverting investment toward renewables to achieve long-term carbon reduction targets, Exxon remains committed to oil and gas. While the company is “also investing in low-carbon technologies, each of these efforts is measured and keeps oil and gas (LNG) production at the core,” says a Morningstar equity report.

Although the strategy may not win praise from environment-conscious investors, it’s likely to prove more successful and, paradoxically, likely holds less risk, the report contends.

The end of the world’s oil dependence is inevitable, but it’s unlikely to occur anytime soon. “Furthermore, gas is likely to have an even longer life thanks to the relative attractiveness of its emissions intensity to coal for power generation and the need to supplement intermittent renewable power,” says Morningstar equity analyst Preston Caldwell.

These trends along with the growing demand for chemicals is guiding Exxon’s investment strategy and will likely deliver superior returns, asserts Caldwell, who recently lifted the stock’s fair value from US$74 to US$76, after incorporating the latest strategic guidance, financial results, and commodity prices. 

The oil major’s investments will focus on producing higher-value lubricants and diesel in its downstream segment and performance products in its chemical segment, “which should lift returns and earnings further,” notes Caldwell.

He forecasts steady earnings growth in the downstream and chemical segments “as new projects and capacity are brought online during the next five years.”

The second-largest oil company in the U.S., Chevron (CVX) boasts exploration, production, and refining operations worldwide. The firm’s production activities span North America, South America, Europe, Africa, Asia, and Australia, while its refineries are located in the U.S. and Asia.

Chevron’s earnings and cash flow will be determined by oil and gas prices for the foreseeable future. Given the uptick in oil prices, “we expect Chevron to deliver higher returns and margin expansion thanks to an oil-leveraged portfolio as well as the next phase of growth, which is focused on developing its large, advantaged Permian Basin position,” says a Morningstar equity report.

Chevron's Permian growth will be supported further by expansion projects in Kazakhstan (due to come online in mid-2023), new developments in the Gulf of Mexico, and potential new discoveries in Mexico and Brazil. “Chevron also now has growth options with offshore gas fields in the Eastern Mediterranean with the Noble acquisition,” says Morningstar sector strategist Allen Good.

Despite Chevron’s large exposure to oil, it is investing in low-carbon businesses to adapt to the global energy transition. It recently trebled its investment in emerging low carbon areas to US$10 billion cumulatively by 2028.

“GHG reduction projects and carbon capture and offset will enable Chevron to achieve its emission targets while investments in hydrogen and renewable fuels will give it a toehold in emerging businesses that could expand in the future,” notes Good who recently raised the stock’s fair value estimate from US$115 to US$128, prompted by the latest financial results as well as updated commodity prices.

French oil and gas behemoth, TotalEnergies (TTE) explores for, produces, and refines oil around the world. It operates refineries primarily in Europe, distributes refined products in 65 countries, and manufactures commodity and specialty chemicals. Total also has a 19% stake in Russian oil company Novatek.

“Total rode the increasing oil and gas prices during the quarter to deliver another round of strong results, putting a poor 2020 further in its rearview,” says a Morningstar equity report.

The recent quarter saw the oil major’s adjusted net income jump to a whopping US$4.8 billion from US$848 million in the same period a year ago. Exploration and production adjusted operating income also increased to US$2.7 billion from US$801 million the year before “due to higher oil and gas prices,” the report adds. The company’s integrated gas and renewable power operating income skyrocketed to US$1.6 billion from US$285 million the year before, due largely to higher liquid natural gas prices, but also from strong results from LNG and electricity trading. This “highlights the strength of the LNG portfolio model and trading organization, which we expect to become increasingly valuable over time as unevenness in the energy transition creates future power supply/demand imbalances and price volatility,” argues Good, who pegs the stock’s fair value at US$57.

Total is working towards a strategic plan that includes achieving net zero emissions by 2050. However, it “does not plan a quick retreat from oil and gas through divestment,” assures Good, noting that instead, the company plans to reduce emissions by bulking up renewables assets.