The oil sector has been taking a beating in recent months. While volatility has defined the remainder of the market, energy stocks seem to buck the trend in heading lower regardless of the news. Naturally, there have been small gains along the way, but for the most part, oil has been sliding lower. Current levels indicate a 26 percent discount against net asset value, a solid indicator that there’s room for improvement, and that it will eventually arrive.
Unlike other stocks, there is demand for oil and other forms of energy that continues to rise alongside emerging economies and the overall population. This makes oil a safer bet than many competitors in the broader market in that eventually, alongside a finite amount of supply, consistently rising demand and inflation, it will reach higher prices. This is a long-term scenario.
Short-term too though, oil holds considerable possibility as well. Crude is currently being sold for between $80-$87. This is well beneath the $90 mark that analysts refer to as the natural level for the commodity. Historically, instances in which oil ascends or descends to a point considerably higher or lower than $90 a barrel for an extended period, it tends to adjust itself to return to that mark.
Alongside the historical levels, a comparison of price to net asset value tends to be a reliable indicator of the direction of oil. The current ratio of crude seems to express that oil has nowhere to go but up and may offer an attractive risk/reward scenario for investors.
Naturally, not all companies are created equally and there is some evidence for certain major oil enterprise over others.
Among the attractive corporations is Hess (HES)-Which appears to have attractive short-term value and has been in the news for considerable insider buying. The Chairman of the Board and CEO John B. Hess acquired 174,950 shares of Hess for a total of $10 million. That is a massive 59.23 percent increase in his stake, indicating his confidence about the upcoming possibilities for HESS to rise. Already, though share prices have been depleted by oils weakness, second quarter earnings tacked on an additional 61.9 percent to $1.78 per share on $9.81 billion total revenue. This is a roughly 26.8 percent year-over-year increase. Should this trajectory continue, it would mean good things for Hess which is currently trading at a P/E ratio of 7.39.
Petrobras Preferred (PBR-A)– Petrobras is being recommended by Barclays’s analysts as among the most attractive stocks by the metric price to net asset value metric. The mammoth Brazilian oil giant has tanked since March, shedding $100 billion in market value as a consequence of the slide in oil prices and more rigid government policies surrounding oil and gas royalties. Also sucking up value has been considerable business development investments. While it has negatively impacted their balance sheet over the past two years and eaten into share prices, potential profits are expected in the near future as a result of their growth endeavors. Three behemoth offshore oil fields near Sao Paolo are expected to begin producing oil and thereby profits, helping to boost the company’s revenue and bolster share prices which are currently at just 7.3 times projected earnings for the year. Petrobras would be a riskier endeavor than Hess, given a large portion of its profits hinge on the success of its new fields. For an investor that doesn’t mind the heat, Petrobras could offer nearly incomparable margins if oil were to return to more normal levels.
Suncor (SU)– Suncor is another stock benefitting from big-time buying. Billionaire investor Steve Cohen has been snapping up shares of the company, which is currently hovering around its 52-week low. Earnings rose for the second-quarter and could continue to get a boost on basis of a return to higher oil prices. Barclays finds the stock to be among the most attractive risk/reward ratio although some argue that Suncor’s technicals remain bearish. While it may be true, Suncor is currently dirt cheap and unlike many major oil companies which have seemingly stopped growing Suncor has huge potential for improvement. The company laid out its growth strategy and it includes ascending from its current production base of roughly 500,000 barrels a day to 1 million barrels a day by 2020. That’s an eight percent per year increase based on Suncor’s existing oil reserves. Suncor, unlike many companies taking huge risks in the depth around Cuba, is relying on existing reserves. The release of that oil, alongside the presumed rise in crude prices over that period, adds to Suncor’s appeal.