The coronavirus pandemic has dealt a heavy blow to energy, putting it on the list of the worst-hit sectors. Dented global energy demand and oversupply have also been hurting the sector for long. However, investors should have reasons to buy oil stocks now as recovering economic activities have been driving crude prices.
Recovering Economic Activity
In June 2020, unemployment rate in the United States dropped to 11.1% compared with the record-high of 14.7% in April, per the U.S. Bureau of Labor Statistics. In May, the U.S. jobless rate was 13.3%. On a positive note, June’s jobless rate was below the consensus expectation of 12.4% of economists surveyed by Dow Jones.
The Labor Department also said that the American economy added 4.8 million jobs in June, beating economists’ consensus estimate of 2.9 million. The job data seems encouraging since the U.S. economy added only 2.7 million jobs in May and lost 20.8 million in April.
The employment data, as provided by the Labor Department, suggests picked up economic activities in the domestic market since strict social distancing measures are being eased.
Economic activities are also picking up across the world. Significant recovery in economic activities has also been witnessed by China, as is evident from the encouraging auto sales data. Per data from the China Association of Automobile Manufacturers, or CAAM, the country’s auto sales witnessed year-over-year improvement of 4.4% and 14.5% in April and May, respectively. China’s vehicle sales data have also improved 11.6% year over year in June, as reported by CAAM.
Oil Demand Turning a Corner
Improving economic and transport activities, since many countries have eased lockdown measures, led to a strong rebound in fuel deliveries in May and June. Many analysts expect July to witness a recovery in fuel demand as well.
Recuperating fuel demand is in turn aiding the considerable improvement in oil price. Since late-April, the price of West Texas Intermediate (WTI) crude surged 210.7% and Brent crude jumped 119%. The crude recovery is also being supported by June’s 108% compliance rate of OPEC+ members – according to Paris-based International Energy Agency (IEA) – with their prescribed cuts.
Stocks in the Spotlight
Recovering crude prices will be beneficial for energy majors with significant presence in upstream businesses. We have employed our proprietary Stock Screenerto screen four prospective oil stocks that are well poised to gain. All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Chevron Corporation CVX said in its 2020 annual stockholders meeting that its business will be resilient even if Brent crude trades at $30-a-barrel for two years. By leaning on its very strong balance sheet, the San Ramon, CA-based leading integrated energy player will be able to sustain dividend payments to shareholders.
Notably, the company has seen upward earnings estimate revisions for 2020 and 2021, respectively, over the past 30 days.
The market is well aware that in April, Royal Dutch Shell plc RDS.A cut its dividend by 66%, mostly to survive the pandemic. Importantly, the move has made it possible for the integrated energy major to lower annual dividend payments by a massive $10 billion, thereby creating additional financial flexibility.
The sizable chunk of money will make Royal Dutch Shell more resilient to the challenging business scenario. The company, with significant presence in upstream business, will also be able to sustain and grow its value, thereby securing more cashflow for shareholders.
Many analysts opine that Shell will deleverage quickly with the massive cash savings from the dividend cut and will reach its gearing target of 25%. Notably, gearing signifies net debt as a percentage of total capital.
The stock has also seen significant upward earnings estimate revisions for 2020 and 2021 over the past 60 days.
EOG Resources EOG has a strong presence in prolific oil-rich shale plays like the Permian and Eagle Ford.
Notably, the company’s balance sheet is significantly less levered than the composite stocks belonging to the industry. In fact, the company’s debt-to-capitalization ratio has consistently been lower than the industry over the past five years. Thus, we can say that the company can rely on its strong balance sheet to survive even if the worries of new cases of coronavirus infections leads oil price to decline again.
In the past 60 days, the energy major has witnessed upward earnings estimate revisions for 2020 and 2021.
Devon Energy DVN also has strong footprint in Eagle Ford and Permian basins in Texas. With oil contribution significantly to total production volumes, the upstream energy firm is well-positioned to capitalize on recovering crude prices.
The stock has seen upward estimate revisions for its bottom line for 2020 and 2021 in the past 60 days.
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Chevron Corporation (CVX): Free Stock Analysis Report
EOG Resources, Inc. (EOG): Free Stock Analysis Report
Devon Energy Corporation (DVN): Free Stock Analysis Report
Royal Dutch Shell PLC (RDS.A): Free Stock Analysis Report
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