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Is Now A Good Time To Invest In The Oil Majors?

By Investing.com (Haris Anwar/Investing.com)ETFsSep 08, 2020 09:56AM ET
www.investing.com/analysis/is-it-a-good-time-to-invest-in-the-stocks-of-oil-majors-200536700
Is Now A Good Time To Invest In The Oil Majors?
By Investing.com (Haris Anwar/Investing.com)   |  Sep 08, 2020 09:56AM ET
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Betting on top oil stocks has always been risky. The biggest challenge investors face when evaluating energy equities is correctly predicting the direction of oil markets.

Even if you’re a long-term energy bull, picking the right stock from the “big oil” group has become more complicated given the uncertain, long-term, demand/supply outlook alongside the rising use of renewables, electric cars and a global push to curb climate change.

The COVID-19 pandemic, which has drastically changed the way the global economy consumes energy, has made this task even more challenging.

While a slow and gradual economic recovery has boosted crude prices in the second quarter, it's still not enough to resolve the deep demand/supply imbalances. Demand has plunged this year after the pandemic forced governments to lock down economies, airlines to cancel fights and workers to stay at home.

Oil prices have more than doubled since the March dip, but they’re still down around 35% this year.  Brent crude fell to $42.66 a barrel on Friday, and is treading below $42 at time of writing, suffering its biggest weekly loss in almost three months as infection rates continued to climb in nations such as the U.S. and India.

Faced with these uncertainties, Saudi Arabia has begun to offer discounts to buyers for October delivery, a sign the world’s biggest exporter sees fuel demand wavering amid more coronavirus flare-ups around the globe, according to a report in Bloomberg.

Oil Shares Remain in the Red

VDE Weekly 2017-2020
VDE Weekly 2017-2020

The Vanguard Energy Index Fund ETF (NYSE:VDE)—whose top 10 holdings include Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and Phillips 66 (NYSE:PSX)—remains down more than 40% for the year, even as the broader S&P 500 has recovered its losses from the March dip.

And if economic uncertainty weren't reason enough to stay way from energy shares, there's an additional hazard for buy-and-hold investors: uncertainty about the sustainability of dividends. A massive slump in oil prices in the first quarter has forced some of the largest gas and oil producers in the U.S. to either freeze or slash their payouts.

In April, Royal Dutch Shell (NYSE:RDSa) cut its dividend for the first time since World War II, reducing it by 66%. Around the same time, oilfield services provider Schlumberger (NYSE:SLB) slashed its dividend by 75%, its first cut in at least four decades.

Exxon and Chevron are among those energy majors which have so far averted reducing their payouts, but that situation could change if the world sees another demand dip, or the alliance to control production and thus supplies among OPEC+ producers falters.

XOM Weekly 2017-2020
XOM Weekly 2017-2020

In the second quarter, Exxon posted a quarterly loss for the second straight quarter, for the first time this century. Chevron lost $8.3 billion in the second quarter, its largest loss since at least 1998.

Many of the oil majors have sought to retain investors despite slowing growth and slumping profits over the past decade, but that doesn’t seem to be the case anymore. Holdings of oil-and-gas stocks by active money managers are at a 15-year low, according to investment bank Evercore ISI.

Bottom Line

Oil stocks don't make a compelling investment case in the current economic environment. Their profits are declining and their dividends are under threat.

These companies are most exposed to negative headwinds, including from oversupply in oil, natural gas and liquefied natural gas. That situation is unlikely to change as long as the pandemic keeps accelerating and sentiment shifts away from fossil fuels.

Is Now A Good Time To Invest In The Oil Majors?
 

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Is Now A Good Time To Invest In The Oil Majors?

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Comments (11)
Victor Ravelo
Victor Ravelo Sep 11, 2020 7:39AM ET
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Maybe with +1% I would consider it
Max Dividend
MaxDividend Sep 10, 2020 1:42AM ET
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The amount of electrical cars on streets today is not a threat for the oil industry.When we start having electrical cargo ships, electrical airplanes, electrical tractors and trucks, electrical buses and motorbikes and at least 10% of private cars electrical, then it would be a significant threat; nevertheless, we are still 30-40 years away from that
meet Singh
meet Singh Sep 08, 2020 3:33PM ET
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Oil will remain essential commodity for next 50 years. Its a temporary phase of pandemic. Demand will rise again for oil. And those genius who say electric cars and bla bla hiw will you fly a jet with electricity.
Sam Iam
Sam Iam Sep 08, 2020 1:58PM ET
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I just looked at the oil chart. It's a short under $41.42.
Sam Iam
Sam Iam Sep 08, 2020 1:55PM ET
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No. Now is not a time to invest in oil majors/oil stocks. That time (to invest) came in the summer.
Rosta Pilny
Raasta Sep 08, 2020 1:20PM ET
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Honestly, will emerging countries have the cash for transition to renewable resources? Might be even developed countries won't. Spain for example posted highest demand for older used cars in decades. That doesn't seem like red light for crude.
dixon pinfold
dixon pinfold Sep 08, 2020 11:49AM ET
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A great many countries are adding a great many drivers over the next few years.  Supply is thus going to tighten up considerably before EVs and renewables eventually hammer oil.  XOM at $38 is going to look puzzling in retrospect.
Andrew carson
Andrew carson Sep 08, 2020 11:29AM ET
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I don't know now that all but one (but not out of the woods either) of the offshore drillers are bankrupt. How would big oil extend their reservers?
Tim F
Tim F Sep 08, 2020 6:24AM ET
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Mot with a 10’ pole
Nigel Ng
TradePA Sep 08, 2020 5:49AM ET
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Before opec control supply. In this new era , theres china russia iran and US as oil exportor. The tap only gonna turn on and off everytine oil is above 50. It is never gonna sustain for long above 80. Big oil History is history just like rail and steel.
 
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