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Why 4 Oil Stocks From Canada to China Rallied in January

Reuben Gregg Brewer, The Motley Fool

What happened

The shares of China Petroleum & Chemical (NYSE: SNP), also known as Sinopec, rose 18% in January, according to data provided by S&P Global Market Intelligence. Not far behind were Canadian oil companies Vermilion Energy (NYSE: VET), with a global asset portfolio, and Suncor Energy (NYSE: SU), a Canadian oil sands specialist, with gains of 16% and 15%, respectively. U.S. based Noble Energy (NYSE: NBL), however, led this international quartet with a 19% leap. Noble's portfolio is global, but it has a material position in the U.S. onshore drilling space.

So what

All of these oil companies, and many more besides them, ended 2018 with stock declines. In fact, from their earlier-year peaks, Sinopec and Suncor both lost a third of their value, while Vermilion and Noble each lost nearly half of theirs. It was a very tough year, with the primary driving force being a steep oil price decline in the final months of 2018.

An offshore oil drilling rig in the ocean

Image source: Getty Images.

With oil prices turning higher in January, it's not surprising that these four companies saw stock gains at the start of 2019. That said, there are some nuances to consider -- like Noble's exposure to the onshore U.S. market. Production here is relatively easy to ramp up because drilling wells is a fairly quick process. In the third quarter of 2018, Noble brought 37 wells on line in the DJ Basin alone -- just one of three of its domestic focus areas. That suggests that it can benefit more quickly from rising oil prices by bringing on new production.   

That's vastly different from what underpins Suncor's business. Oil sands aren't drilled, they are mined. And building an oil sands mine can take years, requiring a large time and financial commitment. Also important is the ability to handle a lot of uncertainty, since oil prices are likely to move around a lot between the time an oil sands project is started and when it is completed.

To put some numbers on that, Suncor owns roughly 54% of the Fort Hills oil sands project in Alberta. Fort Hills was originally approved in 2002, but Suncor didn't get all of its partners on board and ready to start construction until 2013 -- just before the deep 2014 oil price decline. Despite that harrowing oil tumble, Fort Hills moved forward, with the first oil flowing in early 2018 (luckily, oil prices were starting to recover at that point). The project is expected to have a roughly 40-year life span, so it is a long-lived asset, but it took a long time and a lot of money, effort, and faith to get it up and running.   

SPY Chart

SPY data by YCharts

Sinopec, meanwhile, has to be looked at in conjunction with its primary market, China. That nation has been growing relatively strongly for a very long time versus developed nations. But Chinese growth has been slowing of late, and that has investors worried. A headline-grabbing trade spat with the United States hasn't helped that sentiment, either. So while it is easily the largest oil company here -- and the most diversified, with both drilling (upstream) and processing (downstream) operations -- there are complex geopolitical issues added into the mix and reflected in the stock price.

Vermilion is the smallest of this group, but although it's relatively tiny, it has a diversified global portfolio. The problem is leverage: Its debt-to-equity ratio of nearly 0.7 is more than twice that of Suncor and Sinopec. And while Noble's leverage is close to Vermilion's at roughly 0.6 times, Noble is about three times the size of Vermilion. Being small and leveraged tends to exacerbate the impact of volatile oil prices when it comes to investor sentiment. Essentially, you need to pay a little more attention to what's going on at Vermilion.

Now what

Oil prices started to move higher in January. That's great, but oil is still a volatile commodity prone to big, and often swift, price swings. The downturn at the end of 2018 was clear evidence of this. Stuck in the middle of the ups and downs are the world's oil companies, including Sinopec, Suncor, Vermilion, and Noble. Although oil prices are a driving force behind these companies' stock prices, there's more to understand about each and every oil stock. This quartet clearly demonstrates this fact. If you jump aboard here, expect oil price swings to continue, and make sure you understand exactly what that means for each company's business.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.