Oil stocks like RDS stock or XOM stock haven’t been this low since the 1990s. On 2019 expectations, RDS should offer a free cash flow yield of 30% while XOM’s dividend should be at 10%. Those would be called extreme bargains.
However, oil stocks depend on what is going on with oil prices.
With oil at $60 or $65, Shell does make $30 billion per year in free cash flow. But the current market capitalization is just $100 billion which means the market doesn’t agree with Shell’s past prediction because it would be impossible that RDS would ever trade at 3 times earnings.
This means the market doesn’t agree with the oil companies that say how oil prices will rebound to and likely stay above $60 soon after COVID-19 passes. The market is seeing something ahead that oil veterans aren’t.
Oil stocks could be low because:
What THE MARKET IS LIKELY PRICING IN is what happens BEYOND 2021 and COVID! Work from home, internet, zoom, better engines, not just electric, could lead to a decline in demand, where just a 5% decline in demand for oil, could lead to a structural shift, push oil prices lower and it is game over for oil majors.
However, it doesn’t have to happen that fast, which creates many opportunities for speculation. Fundamental investors should find oil stocks with low production costs, low debt and long-term reserves that are profitable at any oil prices if they want to sleep well. Not picking such oil stocks ads the component of time to the investing equation which makes it pure speculation.
Oil stocks are a perfect example of investing in a sector with no moat, a price taker, a highly capital intense business with a negative structural trend hitting it!
Long-term retirement investors should steer away, especially when you have similarly priced commodity stocks in other sectors like fertilizers, copper or natural gas.
Shorter term investors and those willing to wait should take the possible chance to get out if things stabilize in 2022 as oil companies are expecting, when and if the so called dead cat bounce happens, get out. If oil prices do go to $50 or even $60, so will stocks because the market doesn’t understand cyclicality, it always assumes current prices are here to stay forever – that one you will always be wrong on.
Buying Oil Stocks Oil stock prices depend on where will oil prices go. Where will oil price go is anybody’s guess, but oil fundamentals are something we can think about and put that into a risk and reward perspective.
Most western producers expect oil to be at $60 long-term, Russians see it at $40 and Saudi Arabia will simply set the price is prefers long-term. In order to invest in that, you need to know the level of risk you want to accept and understand the risk and reward of each possibility. Oil stocks that have businesses with high production costs will be hit hard if oil is at $40 and jump high if oil goes to $60. Low cost producers will jump much less, but will let you sleep better.
Please hear more about this topic in my video discussing the key elements you need to know before investing in oil stocks.
0:00 Oil Stocks Price 4:11 Oil Price Analysis 8:45 Oil Supply Demand 16:01 Outlook 17:13 Buying Oil Stocks
Sven Carlin Ph.D. is an independent investor and business researcher at Sven Carlin Stock Market Research Platform.
My passion is to look for low risk high reward investment opportunities with a long-term business owning like focus. I apply my accounting skills and investing experience in order to find the best businesses to own that offer the possibility to lead me towards my financial goals. An example of what I do is this oil stocks analysis.