Interactive Investor

Two stocks to own as oil price races toward $100 a barrel

4th February 2022 08:37

Rodney Hobson from interactive investor

Despite the pressure on government to reduce the use of fossil fuels, life is looking brighter for oil companies than at any time in the past two years, says our overseas investing expert. Here are the two stocks he'd buy.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Crude oil prices are back up to levels last seen in 2014 as the world has bounced back more quickly than expected from the pandemic lockdowns, with March contracts for the key West Texas Intermediate and Brent crudes push up towards £90 a barrel. Many experts think the next stop is $100.

Despite the pressure on government to reduce the use of fossil fuels, life is looking brighter for oil companies than at any time in the past two years.

Two factors could affect the equation. Opec, the oil producers’ cartel, plus non-members led by Russia, have agreed to increase supply by 400,000 barrels by March and Iran is seeking to return to the oil market as soon as possible.

However, Opec members have managed only an extra 210,000 barrels so far and there is considerable scepticism over whether it can, or indeed wants to, raise production much further in the next couple of months.

Several members, notably Nigeria and Angola which have failed to invest sufficiently in production, have been unable to fulfil their higher quotas. Meanwhile, Iran still faces sanctions in the West and supplies from Russia will be disrupted if fighting breaks out in Ukraine.

The US and other consuming countries have tried to offset the impact of production shortfalls by releasing oil from strategic reserves, but this can only be a short-term palliative move, not a cure.

Crude production was reduced heavily in 2020 in the depths of the Covid-19 pandemic when it became impossible to give oil away free, let alone sell it. Having bitten that somewhat unpleasant bullet, producer nations are realising they can make more money from higher prices rather than higher production.

At best, crude prices will be restrained rather than sent plummeting. Every dollar on a barrel of oil is a significant boost to the profits of oil companies.

The rosier picture was reflected in fourth-quarter figures from Chevron Corp (NYSE:CVX) and Exxon Mobil Corp (NYSE:XOM). Chevron reported net income of $5.08 billion, easily wiping out the $665 million loss suffered in the same period of 2020 when the oil industry was in crisis.

So much went well as Chevron achieved record cash flow: earnings from the upstream business leapt from $501 million to $5.16 billion while exploration costs fell; the downstream unit swung from a loss of $338 million to profits of $760 million.

Source: interactive investor. Past performance is not a guide to future performance.

There were some favourable distortions such as better weather in the Gulf of Mexico, but even so it is hard to ignore the remarkably better overall picture. The average sales price per barrel of crude oil almost doubled from $33 to $63 just as production jumped from 21,000 barrels a day to 1.22 million.

That meant full year profits hit $15.6 billion compared with a loss of $5.5 billion in 2020. Production reached a record 3.1 million barrels a day while 1.3 billion barrels were added to proved reserves.

Exxon also swung from loss to profit, producing earnings of $8.87 billion for the final quarter and $23.04 billion for the full year. Its downstream arm refined more oil than in any quarter since 2013 and full-year earnings from chemicals hit a record. Exxon is making up for lost opportunities in 2020.

Source: interactive investor. Past performance is not a guide to future performance.

Exxon shares have more than doubled over the past 15 months from $34 to just under $80, where the yield is an attractive 4.33%, but they are still below peaks reached in 2019 and 2020. Chevron shares have also doubled, from $60 in March 2020 to $134 now. The yield is 3.92%.

Hobson’s choice: Exxon and Chevron are well ahead since I advised shareholders to hold on in November. At that stage I was worried about clouds still hanging over the sector. Those clouds have blown away and it is not too late for newcomers to buy.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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