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Summer Driving to Heat Up Crude: 5 Stocks to Buy

Zacks Equity Research

We have already entered into the summer driving season and Americans are on the road again. This year, U.S. roads could see more drivers as the unemployment rate touched record lows and a huge number of SUVs and light trucks were sold over the last two years.

Definitely, refiners need to produce more gasoline to support increasing demand for petroleum products which could boost the price of oil.

Summer Driving Creates Hope for Oil Investors

April through September is usually considered the summer driving season, when long road trips are common in the U.S. This definitely boosts consumption for gasoline – the end product that refiners produce after refining raw crude.

Refiners in the U.S. are gearing up their operations signaling a reduction in stockpiles of crude that should ease the glut. This event is building up hope for oil investors to bet long on crude contracts. In fact, as per Bloomberg, for the first time over six weeks, more hedge funds are betting on higher WTI crude.

Refinery utilization is already high. This year, as of the week ended Mar 31, utilization was 90.8%. According to U.S. Energy Information Administration, this utilization level is the highest since Jan 6. Naturally, we are optimistic on the space as the summer driving season should only jack up the level of utilization.

We are excited also because analysts are expecting this year’s summer driving season to boost oil prices. This is because sales of SUVs and light trucks increased for two years in a row. Moreover, the unemployment rate in the U.S. slipped to the lowest level in almost a decade in March.

OPEC also bet on petrol demand in the U.S. during the summer driving season. In other words, the more crude is processed by refiners to support higher gasoline demand, the greater will be the demand for raw oil and higher will be price of the commodity this summer.

Other Catalysts Driving Crude

As per data reported by the U.S. Census Bureau, China imported 8.08 million barrels of light crude from the U.S. during February, almost four times the purchase in January. This led China to surpass Canada as the biggest importer of U.S. oil. The crude export level of U.S. has skyrocketed to a record 31.2 million barrels in February. In fact, John Auers – executive vice president at financial consulting firm Turner Mason & Co. – commented, “The U.S. is a larger exporter of crude than many OPEC countries.”

According to Bloomberg, since the ban on U.S. crude export was lifted in Dec 2015, the country has exported 239 million barrels of crude. We can say that light oil is gradually spreading across the world.

Growing shipment of U.S. oil to Asia shows improving demand for domestic crude to the outside world. It is obvious that the country is snatching away market share from Saudi Arabia and other producers in the Middle East.

Moreover, speculation that OPEC might extend the production cut deal and Russia will likely follow the same path to combat crude glut is also giving crude a boost.

Potential Gainers

The expected improvement in oil prices should contribute to the cash flows of exploration and production companies as these firms generate revenues out of selling the commodity. Also, drillers and oilfield services players could be good bets as they help oil explorers to efficiently get oil out of the ground.

On top of that, improving demand for gasoline will contribute to refiners’ profits. Overall, investors should bet on both upstream and midstream energy companies at least during the summer driving season.

5 Promising Stocks

Picking the upstream energy stocks from the stock universe can be a daunting task. To simplify the task we have selected stocks using our proprietary stock screener

Here we have picked stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Moreover, these stocks have VGM score of ‘A’ or ‘B’. Our research says that companies having a combination of good Zacks Rank and VGM score are poised for bigger returns.

Houston, TX-based Baker Hughes Inc. BHI is one of the major oilfield service companies in the world, providing an array of services to the global oil and gas industry.

The company currently carries a Zacks Rank #2 and has a VGM score ‘B’. We also expect the company to witness year-over-year earnings improvement of 111.03% during 2017.

Incorporated in 1959, Houston, TX-based McDermott International MDR is an engineering and construction company, solely focused on the offshore oil and gas business.

The company has a VGM score of ‘A’ and a Zacks Rank #2. Also, McDermott surpassed the Zacks Consensus Estimate in each of the prior four quarters with an average positive earnings surprise of 512.50%.

Ocean Rig UDW LLC ORIG is involved in offshore drilling services to exploration and production companies.

The driller carries a Zacks Rank #2 and has a VGM score of ‘A’. Moreover, the company posted an average positive earnings surprise of 66.63% over the prior four quarters.

Headquartered in Houston, TX Evolution Petroleum Corporation EPM is involved in exploitation of oil gas resources in the U.S.

Evolution Petroleum holds a Zacks Rank #2 and has a VGM score of ‘B’. We are anticipating the company to post year-over-year earnings growth of 163.6% for the current year.

Based in Rome, Italy, Eni SpA E, with its consolidated subsidiaries, is engaged in both upstream and refining businesses.

The company has a Zacks Rank #2 and a VGM score of ‘A’. On top of that, for 2017, the company will likely see earnings growth of 762%.

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McDermott International, Inc. (MDR): Free Stock Analysis Report
 
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