WF vs. BEN: Which Stock Should Value Investors Buy Now?
Posting its third quarterly gain in a row, oil prices ended March 2017 up nearly 8% year to date. The commodity got off to a strong start this year with the West Texas Intermediate (WTI) crude futures climbing 7.1% in January. Though the benchmark tumbled 4.8% in February in the wake of a broad stock market selloff, it staged a rebound in March, with the contract up 5.6% for the month.
The first quarter of the year saw U.S. oil benchmark attain its highest settlement since December 2014 despite record high domestic production. Crude was supported by a variety of catalysts, including strong demand and continued production curbs from OPEC and its allies.
What’s encouraging is that the quarterly price appreciation extends an upbeat tone in crude trade into 2018 following the futures contracts’ back-to-back yearly increases. To be precise, the commodity rose about 7.5% in the first three months of 2018 to finish the quarter at $64.94 per barrel.
Reasons for Oil's Quarterly Surge
Red-Hot Demand: The major factor fueling higher oil prices is the fast-growing demand for the commodity, which continues to tighten the market.
Recently, the International Energy Agency (IEA) upwardly revised its crude demand estimates. The energy consultative body, in its closely watched monthly oil-market report, said that global demand is likely to grow by 1.5 million barrels a day this year to average 99.3 million barrels a day. This projection is 90,000 barrels a day above the previous estimate.
On the other hand, supply from OPEC – which still accounts for roughly 40% of the world's crude – is expected to remain weak throughout 2018. The cartel’s strong adherence with the production cut pact has meant that worldwide supplies, currently at around 97 million barrels a day, are lower than demand. This has rebalanced the oil market to a large extent, reflecting positively on prices.
Also, years of low price environment have forced operators to trim their capital expenditures considerably that means a relatively narrow pipeline of new projects.
OPEC Supply Cuts: One of the significant reasons why the U.S. oil benchmark soared nearly 17% in the previous quarter revolved around expectations that OPEC and other major producers will agree to expand their output-cut deal beyond March. True to predictions, the coalition prolonged the current dynamic for another nine months to the end of 2018. The agreement, now renewed twice, keeps 1.8 million barrels a day (or 2% of global supply) off the market in an attempt to clear a supply glut.
Sharp Inventory Drawdowns: The U.S. Energy Department's inventory releases have shown multiple weeks of strong inventory draws in the domestic crude stockpiles, another pointer to a tightening oil market. Oil stockpiles have shrunk in 36 of the last 51 weeks and are down more than 100 million barrels since April last year. The gradual fall – stemming from a combination of lower imports and spiraling exports – has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 429.9 million barrels, current crude supplies are 20% below the year-ago period.
Middle East Tensions, Venezuela and the Fed: Oil prices were also supported by growing concerns over tensions between major crude producers Iran and Saudi Arabia. There is widespread speculation that Saudi Arabia’s Crown Prince Mohammed bin Salman's ongoing state visit to Washington is aimed at ramping up pressure to reimpose sanctions on Iran. As it is, the removal of Rex Tillerson as secretary of state raises questions over the future of the Iran nuclear deal.
There are indications that the 'more hawkish' Mike Pompeo might lead America's exit from the Iran pact if the European allies do not agree to toughen the terms by May 12. This has injected uncertainty into the oil market by threatening the flow of the Gulf country’s swelling crude exports.
Fast falling production in Venezuela have added to the jitters. With the country tethering on the verge of an economic collapse, oil output has dwindled by almost 50% since 2005. Venezuela currently churns out less than 2 million barrels per day, much lower that its pledge per the OPEC-led supply cuts.
Finally, oil prices were also supported by the Federal Reserve’s decision to raise interest rates. As widely expected, the U.S. central bank opted to hike the benchmark lending rate a quarter-point to between 1.5% and 1.75%. This led to dollar weakness that made the greenback-priced crude more affordable for investors holding foreign currency.
How to Identify the Outperformers?
The strong quarterly rally does not necessarily indicate that all energy scrips would be wise picks. Moreover, with a wide range of energy firms thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver attractive returns. 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.
In particular, we have shortlisted five companies that have outperformed oil prices over the past 12 weeks and have 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.
Mammoth Energy Services, Inc. TUSK, a #1 Ranked stock, is our first pick. An oilfield services provider with a variety of equipment, maintenance, and engineering and construction offerings to the energy sector, Oklahoma City, OK-based Mammoth Energy Services shares have gained 63.3% in the past 12 weeks.
Our second choice is Evolution Petroleum Corporation EPM – an oil and gas exploration and production company with primary focus on Louisiana's Delhi Field. This Houston, TX-based Zacks Rank #2 stock has risen 19% in the past three months.
Then we have Flotek Industries, Inc. FTK. Headquartered in Houston, TX, Flotek Industries provides a range of products and services to enhance returns for the oil and gas finders. This Zacks Rank #2 stock is up 30.9% in the past 12 weeks.
GeoPark Limited GPRK is another company we recommend. Headquartered in Santiago, Chile, GeoPark is an independent energy explorer with oil and gas assets spread over Chile, Colombia, Brazil, Argentina and Perú. The company, whose shares have gained 25.1% since the start of January, carries a Zacks Rank of 2.
Finally, there is China Petroleum & Chemical Corporation SNP. Headquartered in Beijing, China Petroleum & Chemical, aka Sinopec, is one of the largest petroleum and petrochemical companies in Asia, apart from being the second largest crude oil and natural gas producer. The Zacks #2 Ranked stock has gained 20.6% in the past three months.
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