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I’ve seen several comments on the site asking this question.

I assume we’re talking about oil stocks in the short- and medium-term. In the long term, I think it’s clear that you should be thinking about selling these out of your portfolio at a profit (of course) whenever you can. Demand for oil will fall in the long-term–defining long-term as 5 years or more–or we can all count on figuring out how to survive 120-degree (Fahrenheit) heat.

Today, August 5, is a good synopsis of what’s going on with oil and oil stocks in the short- and medium-term.

On the one hand, we had a good rally in oil stocks on the July job surprise. The economy added 528,000 jobs, a much higher than expected number. That was read by investors as a sign that economic growth would be higher and that, therefore, demand for oil would be higher too.

So today, oil stocks like ConocoPhillips (COP) and Pioneer Natural Resources (PXD) were up 3.30% and 2.02%, respectively. Chevron (CBX) gained 1.65% and ExxonMobil (XOM) was ahead 1.45%.

But the oil bulls didn’t have it all their own way. Technical supply and demand factors in the oil market continued to push oil prices downward–as they have for the last two months.

On Wednesday, West Texas Intermediate for September delivery fell to $90.66 a barrel. That’s a drop of more than 25% in the last two months from a high of $122.11.

Some of that drop has been on fears that demand would fall as the U.S. (and global) economy slowed. Those were the fears that got partially reversed on Thursday.

But part of that drop in the price of oil has been on a build-up in inventories at the Cushing, Oklahoma hub, the delivery point for U.S. crude oil futures.

It’s logical to think that the inventory build in the storage tanks as Cushing is a result of a drop in demand for oil, but that doesn’t seem to be the complete story.

The end of maintenance at Canadian oil sands producers has led to a surge in flows to Cushing. And traders look to have cut back on buying for export on fears of recession and falling demand. A big part of the drop in oil on Wednesday came after a report from the Energy Information Administration of a 926,000 barrel build at the Cushing hub on a decline in U.S. exports.

And there’s also been a drop in U.S. exports due to a shrinking spread between the futures for West Texas Intermediate and Brent crude, the international benchmark. When that spread shrinks, oil traders cut their buying of U.S. crude and increase their purchases of Brent.

So what does all this add up to for oil stocks? (Please note that the following analysis/advice only applies to the shares of energy companies with a big emphasis on oil production. Natural gas stocks are a different story.)

In the short run, I think we’ve seen a drop in the price of oil and the price of oil stocks that’s a result of trading conditions in the oil market. I think the negative effects of those trading conditions are relatively easily reversed. I wouldn’t sell my oil stock shares because of this short-term trading condition.

In the medium term, I think the determining factor is demand for oil. And there the picture doesn’t look all that positive to me. Global economic growth does look to be slowing. China, a major oil importer, continues to struggle economically, for example.

What do I suggest?

In the medium term, I would look to concentrate on the stocks of oil companies that are seeing big surges in cash flow–and that have made a public commitment to returning a large portion of that cash flow to shareholders in the form of dividends (my preference) and buybacks.

For example, ConocoPhillips announced on Wednesday, August 4, that it would increase its return of cash to shareholders in 2022 by another $5 billion to $15 billion in dividends and buybacks. In the first quarter, the company had announced that it would increase cash returned to shareholders to $10 billion from $8 billion. (For the second quarter ConocoPhillips reported adjusted earnings increased to $5.1 billion, compared with $1.7 billion a year earlier.) That return to shareholders amounts to about 13% of the company’s stock market capitalization. (In the first half of the year, the company has already returned $1.9 billion in dividends and repurchased $3.7 billion in shares.) ConocoPhillips shows a relatively low 2.14% regular dividend yield. But take a look at a measure called total yield that includes dividends and buybacks. Total yield for the trailing 12 months is 5.78% thanks to a 3.64% buyback yield.

What I’m looking for in the oil companies that I hold now in my 12-18 month Jubak Picks Portfolio is a relatively restrained capital budget that looks to modestly increase oil production and where most of the recent increases in spending are a result of compensating for inflation. For example, in its second-quarter earnings report Pioneer Natural Resources raised its full-year capital budget by $200 million (6%) to make up for higher prices for labor, steel, and fuel. Because of higher oil prices, free cash flow projections for 2022 remained at $9 billion. Pioneer, like ConocoPhillips, will send much of that cash flow back to shareholders. In the trailing 12 months, dividends amount to $20.35 a share thanks to a program that combines a regular base rate payout with a variable dividend. The regular dividend yield for Pioneer is 5.80%. Add in the buyback yield of 2.03% and the total yield comes to 7.83%.

Look at the oil stocks in your portfolio to see how they measure up on returning cash to shareholders. If they don’t meet the standard set by ConocoPhillips and Pioneer Natural Resources, I’d consider selling them on the next oil stock rally. ExxonMobil (XOM), I’d note shows a total yield of 5.64% for the trailing 12 months. Chevron’s total yield for the last 12 months is 3.59%.

ConocoPhillips and Pioneer Natural Resources are both members of my Jubak Picks Portfolio.