5 Oil & Gas Stocks That Braved The Sector Headwinds In 2019

In the recent spate of record highs, the S&P 500 Index crossed the 3,200 level for the first time. With this, the benchmark has increased 26.1% so far this year. Most of the rally was buoyed by trade deal optimism, robust U.S. economic indicators and stronger-than-expected corporate earnings. The Fed’s rate cut for the third time in 2019 also whetted the risk appetite of investors.

The trend is likely to continue though bouts of volatility and instability have kept crossing the bulls.

The proxy version, SPDR S&P 500 ETF Trust (ASX:SPY (NYSE:SPY)), which tracks the S&P 500 Index has gained 27.86% year to date.

But even as the books close for a record-setting 2019, energy stocks remain this year’s big laggards.

Energy: The Worst-Performing S&P Sector

While major averages are enjoying their best year in nearly a decade, Energy has been the least successful S&P 500 sector in 2019 with majority stocks in the Energy Select Sector SPDR Fund (XLE (NYSE:XLE)) languishing in bearish zone.

Let’s discuss the 2019 performance of oil and gas in detail:

Supply Side Woes and Sino-US Trade War Plague the Oil Market

Mounting concerns over wilting global demand due to trade war-induced slowdown at a time when U.S. shale output surged had heightened oversupply fears significantly. This put downward pressure on oil prices despite President Donald Trump’s decision to re-impose U.S. sanctions on Iran last November.

The most chief catalyst behind crude’s selling pressure was the deteriorating outlook for oil demand as the trade feud between the United States and China threatened an economic downturn. The protracted dispute between the world's two biggest economies and oil consumers decelerated growth and prompted analysts to lower forecasts for oil demand.

Meanwhile, the U.S. shale production constantly shot up. Per the EIA, volume from U.S. oil fields has expanded more than 50% since mid-2016 to nearly13 million barrels per day, largely driven by a spurt in shale oil production.

Rising Natural Gas Production Shatters Prices

The natural gas scenario also seems to be gloomy as output in the United States climbed to record levels. The EIA forecasts that the United States will produce 91.4 billion cubic feet a day (Bcf/d) of dry natural gas this year, up from the 2018 average of 83.4 Bcf/d, marking a record high for the second consecutive year. Soaring volumes are weighing on the outlook for prices.

What to Expect in 2020

It seems the worst is over for the energy markets.

Oil: WTI crude, the U.S. benchmark, bounced back above $60 per barrel after the United States and China agreed on a so-called phase one deal that is seen as a step to melting trade tensions. Also boosting oil, the OPEC+ group announced trimming output by as much as 500,000 barrels per day from Jan 1 next year for three months. This is in addition to the existing production curbs of 1.2 million barrels per day by OPEC, Russia and other non-member oil producers.

The trade deal helped prop up the demand outlook for oil while OPEC’s deeper supply cut pledge is likely to push the market back into supply deficit. Finally, the growth rate of U.S. shale oil production is set to slacken substantially in 2020 on reduced capital availability.

Natural Gas: Demand for cleaner fuels and the commodity’s relatively lower price catapulted natural gas' share of domestic electricity generation to 37% from 25% in 2011. Moreover, new pipelines to Mexico together with large-scale liquefied gas export facilities meant that exports out of the United States are set for a quantum leap. Finally, higher consumption from industrial projects will likely ensure buoyant natural gas demand.

A Handful of Companies Defied the Downturn

Notwithstanding the unpredictable, declining market, some companies stood firm, indicating investors’ confidence in them. If bought now, these stocks are likely to outperform others and build long-term wealth. As mentioned above, there are reasons to believe that 2020 could be favorable for oil and natural gas stocks. However, selecting stocks to bet on could be a tricky proposition, especially with oil prices moving like a roller-coaster. One should focus on picking up stocks with a sound business, good management and is not pricey.

While it is impossible to be sure about such outperformers, this is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy. Particularly, we shortlisted five companies that have surpassed oil prices over the year and a Zacks Rank of #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

5 Picks With Promises to Reap Higher Profits

Murphy USA Inc. (NYSE:MUSA) , a #1 Ranked stock, is our first pick. Headquartered in El Dorado, AR, is a leading independent retailer of motor fuel and convenience merchandise in the United States. This company with a current market cap of roughly $3.7 billion, has been up 54.1% year to date. Also, the company’s expected earnings growth rate is 3.76% for 2020.

Our second choice is Valero Energy Corp. (NYSE:VLO) . It is one of the largest independent refiners and marketers of petroleum products in the United States. This San Antonio, TX-based Zacks Rank #2 stock has a current market cap of $38.8 billion. Also, shares of the company have soared 26.2% since the start of the year. Its expected earnings growth rate for the upcoming year is anticipated to be 100.73%.

Marathon Petroleum Corporation (NYSE:MPC) , a #2 Ranked stock, is a Findlay, OH-based leading independent refiner, transporter and marketer of petroleum products. Marathon with a market cap of $39.6 billion boasts 3.6% year-to-date price appreciation. It has an expected earnings growth rate of 72.96% for 2020.

Phillips 66 (NYSE:PSX) is another company we recommend. Headquartered in Houston, TX, Phillips 66 is a major international integrated oil and gas company. The shares of the player with a Zacks Rank of 2 and a current market cap of roughly $50.1 billion surged 30.9% since the start of the year. Also, its expected earnings growth rate is 20.29% for next year.

Delek Logistics Partners, L.P. (NYSE:DKL) owns, operates, acquires and constructs crude oil and refined products logistics and marketing assets. Its stock price rose 8.4% year-to-date. This Brentwood-based Zacks #2 Ranked stock with a market cap of $790.05 million has an expected earnings growth rate of 36.46% for 2020.

Zacks Top 10 Stocks for 2020

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.

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