Major economies are looking to increase the supply of oil to calm down prices
President Joe Biden’s administration is taking a proactive approach to handling the oil crisis. He decided to tap into its strategic petroleum reserve in a bid to cool down fuel prices. Since this is an ongoing issue, the U.S. State Department’s senior advisor for global energy security said that the Biden administration is prepared to release more oil from its strategic reserves should they be needed again. Organization of the Petroleum Exporting Countries (OPEC+) producers are resisting calls to push more volume into the market. However, some of the largest economies in the world are joining forces to push oil prices down. The development is having a massive impact on oil refining stocks.
The oil and gas industry brings together a host of conglomerates all over the world. The upstream companies explore new reserves. Midstream pipeline companies store and carry the oil. And downstream companies are responsible for refining oil and gas into the products we all use.
Everyone knows that due to the novel coronavirus pandemic, oil prices crashed worldwide last year. It upended the oil and gas sector. However, crude oil prices are recovering after the Covid-19 vaccines opened up opportunities for economic recovery. Energy demand is surging as people go back to work. Gas prices shot to a seven-year high as the U.S. economy reopened and OPEC+ constrained supply. But now that the U.S. and India, China, Japan, the Republic of Korea, and the United Kingdom are flexing their muscles again, prices can cool down. Refining companies will have a field day if the momentum continues.
Keeping that in mind, let’s look at five oil refining stocks that should thrive in the current environment:
- Surgutneftegas PJSC (OTCMKTS:SGTPY)
- Vertex Energy (NASDAQ:VTNR)
- S.M. Energy (NYSE:SM)
- ExxonMobil (NYSE:XOM)
- B.P. (NYSE:BP)
Oil Refining Stocks: Surgutneftegas PJSC
Surgutneftegas doesn’t get as much attention in the U.S. because it is based in Russia. It is the third-biggest Russian oil company by production volume and was created after the mergers of several state-owned enterprises. Interestingly, the company has set aside massive cash during its operating history.
That strategy strikes many as contrary to the business model employed in the U.S., where management is more aggressive in its approach. ExxonMobil, Shell (NYSE:RDS-A, NYSE:RDS-B), and other companies of this ilk invest capital aggressively. Despite the pandemic, they are looking to spend billions in the forthcoming quarters to regain lost ground.
Nevertheless, keeping so much cash on hand has allowed Surgutneftegas to maintain a stable payout and one of the best yields on the Russian market when it comes to preferred stock dividends. It is worth noting that Surgutneftegas has a unique way to calculate its payout.
Preferred stock dividends are expected to total 10% of RAS (Russian Accounting Standards) profit divided by 25%, while the ratio depends on whether or not there has been a currency evaluation gain/loss. Due to this peculiar dividend policy, the dividend yield rises exponentially whenever the ruble weakens.
While that is all well and good, there might be a set of investors who still want to know what the company plans to do with the pile of cash at its disposal. Management is tight-lipped. And American investors can appreciate that the regulatory environment in the U.S. is different from that of Russia. Surgutneftegas’s preferred stock, though, is a good investment. If the cash is not used effectively, you still have a juicy yield.
Vertex Energy (VTNR)
Vertex Energy is a specialist in the refined distribution and marketing of petroleum products and one of America’s leading processors for used motor oil. Like the other major oil companies, Vertex Energy did not have a great 2020. However, it has done well this year.
Vertex Energy posted a net income of $10.6 million in the third-quarter, comparing very favorably with a net loss of $2 million last year. Adjusted EBITDA came in at $1.5 million, compared to ($0.5) million in the year-ago period.
Third-quarter results showed that despite a 14-day outage in September at the Marrero refinery and temporary hydrogen shortage — due to force majeure events. The company’s performance was primarily driven by improved margins and collections, which accounted for much of the growth.
Despite the positive quarter, the markets did not react favorably. Sentiment has been negative since October when the company announced it is raising debt worth $155 million. But there is a silver lining to this development. Vertex Energy is in the process of transforming its operations.
It sells its core used motor-oil and recycling assets to become a renewable diesel producer by acquiring Shell’s refinery near Mobile, Alabama, for $75 million. Benjamin P. Cowart, president and CEO of Vertex, said the company looks “forward to closing on the Mobile transaction during the first quarter 2022.”
Hence, the markets are overreacting to the debt raise. If you look at the big picture, management is looking to the future and pivoting in the right direction. Along the way, investors will have to suffer short-term losses. However, if you hold this one for the long term, there is upside potential.
Oil Refining Stocks: S.M. Energy (SM)
This Exploration and Production (E&P) firm has operations in Denver, Colorado, and is most notable for its work with natural gas in the Eagle Ford and Permian Basins.
It’s a company that owns properties in several strategic areas and then either disposes of them or develops them. It managed well during the coronavirus crisis, and the latest quarter highlighted its disciplined approach towards growth.
Adjusted net income was $91.5 million, or 74 cents per diluted common share, compared with an adjusted net loss of $5.5 million, or 5 cents per diluted common share, for the same period in 2020. The company reported more than 14 mmboe/d, million barrels of oil equivalent per day, up 23% from the prior year and 15% quarter over quarter. Oil accounted for 56% of production.
In detailing the earnings report, the company upped the production guidance range between 135.6 MBoe/d and 137 MBoe/d with 54% to 55% dedicated to oil. Meanwhile, the capital expenditure guidance was narrowed between $670 million and $675 million.
Despite these excellent results, momentum is muted for the stock, with shares dropping 13% in the last month. Hence, it is trading at an attractive 4 times forward price-to-earnings. No wonder Louis Navellier rates this stock so highly.
Exxon suffered through its worst year in four decades, losing $22.4 billion in 2020 versus a profit of $14.3 billion in 2019.
The loss was due to the markdown of their U.S. natural gas fields, which were worth more before fracking flooded markets with low-cost fuel in recent years. This led to a decline in demand for this product by consumers all over America.
However, things are starting to improve this year. Quarterly earnings jumped by $7.4 billion in Q3. Cash flow from operating activities of $12.1 billion helped the oil and gas giant pare down debt, finance capital investments, and distribute dividends.
Chairman and CEO Darren Woods, commenting on future distributions said, “We anticipate the company’s strong cash flow outlook will enable us to further increase shareholder distributions by up to $10 billion through a share repurchase program over 12-24 months, beginning in 2022.”
Also, if you want to invest in ExxonMobil, it is vital to keep their future plans in mind. It has outlined an aggressive capital outlay program to double profits and cash flow by 2027 from pre-pandemic levels. Capital expenses will range from $20 billion to $25 billion per year through 2027. It is higher than the $16 billion to $19 billion range outlined earlier for the current year.
ExxonMobil will spend $15 billion on emission-reduction technology. Areas earmarked for investment include carbon capture and sequestration, which could also help Exxon reduce greenhouse gases from its existing operations. With the size of the ESG market these days, it is a smart move on ExxonMobil’s part.
Oil Refining Stocks: BP (BP)
Much like ExxonMobil, B.P. is back in business after a disastrous 2020. The British multinational oil and gas company saw third-quarter profit increase to $3.32 billion, from $86 million a year ago. Cash flow from operations grew to $5.98 billion from $5.2 billion in the year-ago period. It will be announcing an additional $1.25 billion share repurchase before publishing fourth-quarter results, which follows their already completed $1.4 billion buyback program.
To piece together a plan for its future, BP used some extra cash to pay down liabilities. By the end of three months, with no pandemic outbreaks and prices stable or improving significantly in many parts around the world, net debt fell to $31.97 billion, down from $32.71 billion in the prior reported quarter.
The company will spend between $14 billion and $16 billion from 2022 to 2025. It is a very aggressive capital outlay plan for an enterprise struggling with the pandemic. In 2021, it has maintained a budget of $13 billion, consistent with prior guidance. Overall, BP exceeded expectations this quarter. However, shares are trading at just 6.5 times the forward price to earnings. Consequently, it is a great business available at a discount.
This article originally appeared at InvestorPlace.
On the publication date, Faizan Farooque did not have (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.