U.S. Markets closed

Why This Trio of Oil Stocks Rebounded More Than 10% in January

Matthew DiLallo, The Motley Fool

What happened

After plunging 40% over the final three months of 2018, oil prices snapped back to start 2019, rebounding 18% for the month. That rally in the oil market sent most oil stocks higher, including shares of producers Denbury Resources (NYSE: DNR), Marathon Oil (NYSE: MRO), and Diamondback Energy (NASDAQ: FANG), which all rallied more than 10% for the month, according to data provided by S&P Global Market Intelligence

So what

Oil prices quietly rebounded to start 2019, bouncing back 18% as the efforts of OPEC and others to drain off the excess oil supplies that were weighing on crude prices started paying off. The ensuing higher oil prices helped boost shares of oil producers, which got walloped to end 2018.

A long row of pumpjacks under the setting sun with snow in the foreground.

Image source: Getty Images.

Denbury Resources was among the hardest hit by last year's sell-off. Shares of the oil producer had been up nearly 200% at one point thanks to higher oil prices earlier in the year, before crashing to end 2018 down more than 20% as the slump in crude came right as Denbury unveiled a puzzling acquisition.

However, with oil bouncing back in January, it helped spark a rally in Denbury's stock since it needs those higher oil prices to give it the cash flow to help pay down its large debt load. On top of that, the company won a favorable court ruling relating to a helium supply contract last month; that also helped buoy the stock since it won't have to pay additional damages above what was in the agreement. Those two factors helped drive the oil company's stock up 18.7% last month.

Marathon oil also enjoyed a bounce-back month in January thanks to higher oil prices. Shares were up more than 40% last year before a fourth-quarter plunge pushed its stock down more than 15% for the year. That sell-off led an analyst from Bank of America Merrill Lynch to note that Marathon Oil stood out as one of the best values in the oil sector. That bullish take, along with higher oil prices, helped ignite an 11.2% rally in Marathon Oil's stock last month.

Diamondback Energy also went on a wild ride last year as its shares were up double digits through the third quarter before falling off a cliff to end the year down more than 26%. That sell-off caused several analysts to see upside potential in Diamondback Energy last month.

BMO Capital Markets led things off by upgrading the oil company's stock in early January from market perform to outperform, stating that Diamondback's anticipated 22% growth in production per debt-adjusted share through 2022 was "near the high end" of the stocks it covers. Barclays followed a couple of weeks later by initiating coverage on the stock with an overweight rating, saying that Diamondback "checks the box in all the right places" as it has a strong balance sheet and a high-quality asset base.

Finally, Mizuho initiated coverage with a buy rating on the stock near the end of the month, noting that it is among the best in the sector at delivering sustainable cash return growth after it boosted its dividend for 2019 by 50% and appears poised to send even more cash to investors in the coming years. That string of upgrades, when combined with the fuel from higher oil prices, helped push Diamondback Energy's stock up 10% last month.

Now what

Oil prices continued their wild ride last month, which is causing intense volatility among most oil stocks. It's not clear what direction crude oil will take from here since both positive and negative catalysts abound. If the negative ones materialize, however, they'll have a greater impact on Denbury Resources because its balance sheet isn't yet back on solid ground. So investors should steer clear of that oil stock for now and instead take a closer look at Marathon and Diamondback Energy since they're better prepared to navigate the oil market's current uncertainty.

More From The Motley Fool

Matthew DiLallo owns shares of Denbury Resources. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.