Crude Awakening: 3 Energy Plays Set to Strike Liquid Gold for Investors
Oil prices have surged approximately 15% this year, hovering near $90 a barrel with expectations of remaining at elevated geopolitical tensions. This rise in oil prices was fueled by increasing tensions between Iran and Israel, raising concerns about broader conflicts in the Middle East. In this piece, we look at three energy plays to gain exposure to the rising oil prices through energy stocks.
Such developments have led to increased market volatility, with significant impacts on oil prices, bonds, commodities and global stocks, which experienced a sharp drop last Friday. Amid these tensions, oil prices tend to outperform as well as safe-haven assets like government bonds and gold.
Although the market movements were relatively modest, the ongoing uncertainty has reignited fears of sustained high oil prices and potential supply disruptions, which could perpetuate high inflation levels. While the current situation doesn’t look like it will escalate into a wider conflict, it still warrants a heightened risk premium on oil.
The International Monetary Fund warned that an escalation could lead to a 15% spike in oil prices and additional shipping costs, potentially raising global inflation by approximately 0.7%.
“A geopolitical risk premium appears to have been built into the oil price, but, clearly, further escalation presents further upside risks,” said Thomas McGarrity, head of equities at RBC (NYSE:RY) Wealth Management.
Also contributing to the tight oil supply and rising prices are production cuts by OPEC and other major producers. In response, Morgan Stanley (NYSE:MS) has adjusted its third-quarter forecast for Brent crude to $94. Along these lines, energy stocks have benefited from these trends, with notable gains in both U.S. and European markets.
“The rise in oil prices complicates central banks’ efforts to bring inflation back down to target levels. Having exposure to the energy sector arguably provides the best hedge to both inflation and geopolitical risks in equity portfolios near term,” said RBC’s McGarrity.
Chevron (CVX)
Chevron (NYSE:CVX), one of the world’s leading integrated energy stocks, benefits significantly from higher oil prices due to its extensive upstream operations, which include exploration, extraction and production of crude oil and natural gas. The increase in oil prices directly boosts Chevron’s revenue and margins, particularly in its upstream segment.
Moreover, Chevron’s pending acquisition of Hess Energy (NYSE:HES) is expected to expand its asset portfolio and enhance its ability to capitalize on rising oil prices. The acquisition notably includes the Stabroek block in Guyana, a standout asset due to its exceptional cash margins and low carbon intensity.
This asset is not only profitable but aligns with the growing industry priority on sustainable energy production, expected to continue delivering production growth well into the next decade. Furthermore, Hess’s Bakken assets enhance Chevron’s existing U.S. shale operations in the DJ and Permian basins. The inclusion strengthens Chevron’s domestic energy capabilities, further bolstering its position in significant U.S. shale regions.
Chevron stock is up 9% year-to-date (YTD), which suggests there’s more upside to come if oil prices can stay at these levels or even increase amid tensions in the Middle East.
ExxonMobil (XOM)
ExxonMobil (NYSE:XOM) is another major player in the oil and gas industry. The company is well-positioned to benefit from rising oil prices given its extensive upstream activities, which are the most significant contributors to its earnings.
ExxonMobil’s integrated business model allows it to capture value across the oil and gas chain, although its downstream operations might suffer from higher feedstock costs when oil prices are high.
The company’s decision to acquire Pioneer Natural Resources (NYSE:PXD) for $59.5 billion signifies a major commitment to fossil fuel production, despite growing global concerns over climate change. However, this deal, the largest since Exxon’s merger with Mobil in 1999, positions ExxonMobil’s operational future, predominantly in Texas and the Guyana coast. Those areas are known for their substantial oil reserves.
ExxonMobil stock is up almost 20% YTD as energy investors see this company as the best-positioned to gain exposure to the oil sector and rising prices.
Shell (SHEL)
Shell (NYSE:SHEL), with its dual focus on oil and gas and a growing interest in renewable energy, is also significantly impacted by fluctuations in oil prices. The company’s upstream operations, which involve oil and gas exploration and production, benefit directly from higher oil prices, improving profit margins and cash flow.
The company’s natural gas trading division has become significantly profitable, especially following Russia’s invasion of Ukraine, which heightened price volatility. That is particularly evident in the liquefied natural gas sector, where sales have surged following the completion of maintenance at crucial projects.
Shell stock received a boost earlier this month following a first-quarter guidance update that analysts generally viewed as positive. The update highlighted increased volumes and improved margins in energy stocks. However, the company noted the integrated gas trading results, while strong, would be “significantly lower than an exceptional” fourth quarter.
Shell shares are up 11% YTD.
On the date of publication, Shane Neagle did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
