Oil stocks are due for a rally.
To be clear, a lot of oil companies have dealt with volatility over the last few years. And most will continue to. However, if you're selective, there are a few companies set for solid returns... thanks to Washington, D.C.
Here's the deal...
Last year, Democrats and Republicans recently got around to making deals in a budget session. The Republican idea: Lift the ban on U.S. crude exports - which had been in place for 40 years, since the OPEC embargo.
Rather than reflexively oppose the Republican plan, Democrats made a counteroffer. Sure, lift the oil ban. Also, lengthen the investment tax credit for solar power by five years. And, at the same time, retroactively extend the wind production tax credit to last year all the way through 2019.
These were two great ideas. And together, they're a win-win.
And as a result, some (though not all) U.S. oil producers began experiencing significant benefits.
Why Is This a Big Boost for American Oil
Lifting the crude export ban was great news for several companies, particularly those at work in shale and tight oil plays that produce light, sweet crude.
Why? Because we have more than enough of that type of oil in the U.S.
In fact, U.S. crude oil inventories are way over their five-year average. Based on the most recent storage capacity data, tank farms for crude oil in Cushing, Oklahoma - the hub of America's oil industry - were 79% full.
So how does the Washington deal help?
It lets American producers ship light oil to other countries that have the refining infrastructure to process it. Refiners in the U.S. are near capacity in this regard, and they're not planning a lot of infrastructure upgrades anytime soon.
Meanwhile, the kind of high-quality oil that comes out of U.S. shale basins is in big demand in Europe and elsewhere. Refineries there are not configured to handle as much heavy, sour crude as OPEC wants to sell them.
So, thanks to the deal, more U.S. oil will ship overseas.
Energy companies' profits are good. But this probably won't have much impact on the price you pay at the pump. Refineries have plenty of supply and can always import more.
In fact, some foreign crude trades at a steep discount to the U.S. benchmark, West Texas Intermediate.
Western Canadian, Iraq Basrah and Mexican Mix to name a few, are all trading at big discounts. As long as U.S. refiners are geared to handle it, they should have more than enough of cheap crude. And they should stay very profitable.
Meanwhile, U.S. suppliers of light sweet crude will find buyers for their product overseas.
This won't be across the board. Not all companies will see a drastic improvement. Some might not see any.
But the big oil producers in North Dakota could be looking at a shiny future.
Be aware, of them lost money in the most recent quarter. Some even lost a lot of it. But they may now have a light at the end of the tunnel...
Indeed, they’ve already had some great returns. And there’s still plenty more upside...
Hess (NYSE: HES) sees 2017 as the start of an exciting new chapter. They are increasing activity in the Bakken and the Liza Field in Guyana is one of the industry’s largest oil discoveries in the last 10 years. Last year, Hess was up 26.5%. Year to date Hess is down but, it had a similar start last year.
EOG Resources (NYSE: EOG) owns some of the premier oil shale locations in the U.S., with vast acreage in areas such as North Dakota's Bakken region and the Permian and Eagle Ford Basins in Texas. The benefits of its premium drilling strategy are beginning to show in its operating performance. Last year, EOG was up 42.8%. This year has not seen much change. Last year EOG didn’t really take off until March/April.
Continental Resources (NYSE: CLR) will continue to focus its investments on core operating areas. It expects to realize further efficiency gains and cost reductions as it optimizes its portfolio. Because of its quality assets and operations, it is able to deal with the volatility in today's energy market. Last year, Continental was up 124.3%. This year has started off rocky but, it really didn’t take off last year until March.
Enterprise Products Partners (NYSE: EPD) has seen its cash flow suffer some declines from lower commodity prices over the past few quarters. But a slew of new assets coming online are helping offset those. 2016 was highlighted by 11.7% volume growth from their NGL, refined products and petrochemical pipeline and marine terminal assets to a record 4.6 million barrels per day. Last year, Enterprise Products was up 5.7%.
Enbridge (NYSE: ENB) entered 2016 well-positioned to execute its five-year strategic plan, which includes a growth program. The execution of the plan has continued. It completed its “Eastern Access” goals by getting the Line 6B expansion into service. And it delivered another solid year. Last year, Enbridge was up 26.9%.
These are the companies that look to keep benefiting from the lift on exports.
To be sure, we think oil prices can - and probably will - go lower.
We're seeing tremendous oversupply worldwide. And we don't expect global oil prices to really recover until 2018.
But for these select few companies, there's still real opportunity.
For many investors, the oil sector might seem like a scary place. But we see opportunity. These stocks look set to ride a flood of government money.
The Energy & Resources Digest Research Team
The Oxford Club
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