When President Donald Trump announced in early May 2018 that the US would be withdrawing from the Joint Plan of Action (JPA) deal with Iran, it set the stage for good things to come – IF you were an investor in the oil, gas, exploration and energy space. The entire energy complex has been beaten down of late, but things began to shift in early 2018. Now may be the time to energize your portfolios with some oily names.
The trend is your friend
Before we dive into specific names to consider adding to your portfolio, lets take a look back and see what happens to Iran’s crude production in times of sanctions and embargos. Why? Because that has direct relevance to how things could play out again – this time in favor of US oil and gas producers.
From the chart above, and the table of events linking Iran’s oil production to significant world reaction towards it’s foreign and defense policies, it would appear that production declines usually follow sanctions and embargos. Those production figures also tend to increase on positive news – like the 2013 signing of JPA and lifting of US sanctions in 2016.
Astute energy-patch investors would therefore recognize that this trend is one that they should befriend! It is very likely that, with the US withdrawal from JPA, and the renewal of pre-2016 sanctions on Iran back in force, the recent acceleration in the country’s oil production will once again revert to the trend – a declining one!
Since 2008-09, US oil producers have been in overdrive. However, late last year (November 2017 – this was by the time it was plain to see that the Trump administration would carry through its campaign promise to pull out of JPA and reimpose the Iran sanctions) US crude oil production finally cracked the 10-million barrels/day ceiling for the first time since 1970.
The infusion of new capital in the industry, particularly a 60% increase in 2017 in shale gas exploration, and a further projected 20% more this year (2018), is providing the opportunity that investors are looking for. Newer technologies, like fracking, are further compounding the positive outlook for the US oil and gas industry. Clearly, this means that major US players are now well positioned to absorb any supply deficiencies as a result of displaced production from Iran’s oilfields.
It is anticipated that the US will reach 12 m b/day by 2019, possibly eclipsing Saudi Arabia and Russia in terms of global oil dominance. And that’s where the stock market will offer new opportunities for portfolio managers and retail investors alike.
The names in this portfolio are fairly well-diversified, with the “usual heavyweights” like CVX, XOM and OXY forming the core. These behemoths are giant cash-flow generation machines, and can withstand anything that the market might throw at them – including the possibility that our investment thesis might be entirely overestimated. They also offer investors decent – and steadily increasing -dividend yields, which have kept investors loyal to these names throughout the downturn.
But the names in this list also include integrated players that not only have exploration and production facilities, but also operate refineries, service stations and wholesale and retail petroleum sale/distribution networks. Included in this category are names like SNP and SU. It doesn’t harm the portfolio either, that these names (SNP and SU) add geographical diversification too – with major operations primarily focused in China and Canada respectively.
The chart above shows a short-term price move for all these names. Why are we interested in short-term momentum? Because the imminent kicking-in of the US sanctions against Iran have added a burst of energy (no pun intended!) in the price momentum of each of these names. It is that short-term acceleration that we believe needs to be highlighted as something that could potentially continue into the future, based on our investment thesis. Whether you are a short-term trader in the energy space, or a longer-term investor looking to build a strong portfolio of oily names, you’ll be happy with the overall performance of this basket of stocks.
And remember: This average move (of nearly 9%) over the short-term, only represents price appreciation. Any dividends that might have been declared in the interim (and most of them are dividend-payers) aren’t accounted for in the calculations.
For investors that don’t wish to take the time or trouble to research individual picks, the ETF route might be best to gain exposure to the oil/energy sector. Three names that you might find interesting include:
- Energy Select Sector SPDR ETF (XLE)
- Vanguard Energy ETF (VDE)
- SPDR S&P Oil & Gas Explor & Prodtn ETF (XOP)
Like the individual names highlighted earlier, all of these ETFs have seen short-term spikes in their prices. And just as you would with individual stocks, investors need to assess whether these names can fit into their portfolio – especially considering the MERs (0.10% to 0.35%) that you’ll need to pay, in addition to any trading costs.
Oil & Gas Players are an interesting investment but these MUST BUY Stocks are set to soar
Get this recently published report 4 Best Blockchain Stock To Invest In Right Now or Volatility Must Buy Stocks report absolutely free.
Author does not have investment in stock discussed in this article.