Betting on the best oil stocks has always been risky. The biggest challenge investors face when evaluating energy stocks is correctly predicting the direction of the oil markets.
Even if you are a long-term energy bull, choosing the right stocks from the "big oil" group has become more complicated given the uncertain long-term supply / demand outlook alongside the increasing use of renewables, auto & # 39 s and a global push to curb climate change.
The COVID-19 pandemic, which has dramatically changed the way the global economy uses energy, has made this task even more challenging.
While a slow and gradual economic recovery has provided momentum in the second quarter, it is still not enough to resolve the deep imbalances between supply and demand. Demand has fallen sharply this year after the pandemic forced governments to lock up economies, airlines had to call off fights and workers had to stay at home.
Oil prices have more than doubled since the dip in March, but are still down about 35% this year. crude oil fell to $ 42.66 a barrel on Friday, falling below $ 42 at the time of writing, taking its largest weekly loss in nearly three months as contagion levels continued to rise in countries like the US and India.
Faced with these uncertainties, Saudi Arabia has begun offering buyers discounts for delivery in October, a sign that the world's largest exporter is seeing demand for fuel falter amid more coronavirus flare-ups across the globe. world, according to a report in Bloomberg.
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Oil stocks remain in the red
The Vanguard Energy Index Fund ETF (NYSE 🙂 – whose top 10 holdings are Exxon Mobil (NYSE :), Chevron (NYSE 🙂 and Phillips 66 (NYSE 🙂 – remains more than 40% lower this year, even as the broader has recovered its losses from the March dip.
And if economic uncertainty was not enough 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 oil prices in the first quarter has forced some of the largest US oil producers to freeze or cut their payouts.
In April, Royal Dutch Shell (NYSE 🙂 cut its dividend by 66% for the first time since World War II. 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 averted their payouts, but that situation could change if the world sees a new dip in demand, or if the alliance to reduce production and thus supply from OPEC + producers. control, falter.
In the second quarter, Exxon posted one for the second quarter in a row for the first time this century. Chevron lost $ 8.3 billion in the US, its largest loss since at least 1998.
Many of the oil companies have tried to retain investors despite the slowdown in growth and declining profits over the past decade, but that doesn't seem to be the case anymore. Ownership of oil and gas stocks by active money managers is at a 15-year low, according to investment bank Evercore ISI.
Bottom Line
Oil stocks are not a convincing investment case in the current economic climate. Their profits are falling and their dividends are under threat.
These companies are most exposed to negative headwinds, including an oversupply of oil and liquefied natural gas. That situation is unlikely to change as long as the pandemic continues to accelerate and sentiment shifts from fossil fuels.
