As the third quarter earnings season kicks off, some top energy producers will come to the attention of investors. Stakeholders will look for any sign of recovery after oil demand collapsed during the COVID-19 pandemic.
For long-term investors looking for value in depleted energy stocks, now may be the right time to make some bargains in the industry.
Although a slow and gradual economic recovery has provided impetus after the March dip, the increase is still not enough to resolve the deep imbalances between supply and demand. Cars and trucks quickly returned to the road when officials lifted movement restrictions this spring, sparking a resurgence in diesel consumption. But planes have slowed back into the air, hampering the sale of kerosene or jet fuel.
Demand for passenger flights is likely to decline by more than half this year compared to 2019, the Organization of Petroleum Exporting Countries (OPEC) said last week. Fuel economy in the aviation sector will not surpass pre-coronavirus levels until 2025, the group said in its annual report on the long-term future of oil.
With this suppressed demand from the aviation industry and a vigorous second wave of COVID-19 currently underway, Saudi Arabia is considering canceling OPEC plans to boost oil yields early next year, according to the Wall Street Journal- report, citing senior Saudi oil advisers
During the summer, the group moved forward with the first increase in production. The next two million barrels per day were expected to start flowing in January. According to the report, Riyadh is considering postponing the move until the end of the first quarter, according to oil advisers in Saudi Arabia.
Weak recovery in oil stocks
Despite these depressing demand forecasts, the oil sector remains one of the worst performers during the pandemic. The Vanguard Energy Index Fund ETF (NYSE 🙂 – whose top 10 holdings are Exxon Mobil (NYSE :), Chevron (NYSE 🙂 and Phillips 66 (NYSE 🙂 – remains more than 45% lower this year, even as the broader has made up for his losses from the dip in March.
And if economic uncertainty was not sufficient reason to stay away from energy stocks, there is an additional danger to buy-and-hold investors: uncertainty about the sustainability of dividends. A massive drop in sales this year has forced some of the largest oil producers in the US to freeze or cut their payouts.
In April, Royal Dutch Shell (NYSE 🙂 cut its dividend for the first time since World War II, reducing its payout by 66%. At about the same time, oilfield service provider Schlumberger (NYSE 🙂 cut its dividend by 75%, the first cut in at least four decades.
Exxon and Chevron are among those big energy companies that have so far avoided lowering their payouts, but that situation could change if the world sees a new drop in demand, or if the alliance turns OPEC's production and thus supply + producers is faltering.
Exxon's 10% Dividend Yield
With shares of $ 34.63 as of Monday's close, Exxon's now 10% dividend yield certainly indicates that the largest oil producer in the US probably won't be able to sustain the quarterly payout of $ 0.87 per share.
Exxon posted a loss for the second straight quarter, the first time this century. Chevron lost $ 8.3 billion in the US, its largest loss since at least 1998.
But not everyone is pessimistic about oil stocks. Billionaire Carl Icahn, who has made much of his fortune betting on energy, says the battered sector is an attractive corner of the market.
Icahn has huge stakes in energy companies such as CVR Energy (NYSE 🙂 and Occidental Petroleum (NYSE :). He believes the shift from fossil fuels to renewable energy will take a long time and "it will take much longer than people think."
"Obviously I'm not telling you to go out tomorrow and buy energy supplies, but … if you look back in three years, you could say," Gosh, I could have used those energy supplies. buy & # 39 ;, ”he said in a CNBC interview.
Despite these optimistic views, investors generally remain bearish for energy stocks. Ownership of oil and gas stocks by active money managers is at a 15-year low, according to investment bank Evercore ISI.
Bottom Line
Third-quarter earnings will provide investors with another opportunity to see if oil companies have experienced the worst of the current downturn. That said, we don't believe oil stocks are a compelling investment case for private investors.
Unfortunately, these companies are the most exposed to negative headwinds, also due to an oversupply. Even if that situation improves in the short term, the broader shift in the economy towards clean energy sources remains an existential threat to these players.
