Tuesday looks like a bad day to invest in oil stocks as bad news in the oil sector takes a toll on shares of major oil companies ExxonMobil (NYSE: XOM), ConocoPhillips (NYSE: COP)And BP (NYSE: BP).
OilPrice.com reports a “plunge” below $75 a barrel in Brent crude oil prices (currently $74 and change). WTI crude — more popular in the U.S. — is suffering a similar decline, down 3.8% to around $70.70 as of 10:30 a.m. ET.
Shares of Exxon fell 3.2%, followed by BP with a 3.5% drop, while Conoco closed lowest with a loss of 3.7%.
What’s the problem with oil stocks today?
OilPrice.com places the blame for today’s sell-off squarely on OPEC — or, more accurately, OPEC+, which includes Russia and other oil producers that aren’t part of OPEC itself. Aiming to stabilize oil prices after a production cut in Libya, OPEC+ reportedly plans to gradually increase production starting in October, a move that would increase oil inventories and thus lower oil prices.
What is interesting is that the size of the OPEC+ production increase, which is expected to start at just 180,000 barrels per day (bpd), will barely offset Libya’s loss of market share. 700,000 bpd production. If you look at this in isolation, it therefore seems like a weak catalyst to cause so much damage to oil prices.
But there is a second factor that is putting pressure on oil prices: China.
It is the world’s largest oil importer, and Reuters reports that production in the Middle Kingdom has fallen to a six-month low. In addition, the country’s purchasing managers index fell to 49.1 from 49.4 in July, indicating that the economy is currently in a state of contraction. OilPrice assumes that this is “bearish” for Chinese oil demand. And when Chinese demand falls, that means global demand falls too. And if you’ve been following Econ 101, you know what that means: oil prices will fall too.
And that is exactly what we see happening today.
Is it time to sell oil stocks?
And here’s the good news: Oil is notoriously a cyclical industry, one in which strong prices are followed by weak prices and vice versa. If you can be patient, it’s likely that oil prices will improve, and with them, the popularity of oil stocks like Exxon, BP, and Conoco.
And it’s not like these three stocks are terribly expensive!
At 14 times trailing earnings, ExxonMobil stock is the most expensive of the three. With long-term forecasts of 6% annual earnings growth and a dividend yield of 3.2%, Exxon stock costs more than I’d be willing to pay. But with a price-to-earnings ratio that’s less than half of the S&P 500 With an average index of 29, Exxon still offers a relative bargain.
Conoco’s valuation is similar, but better. It pays a slightly smaller dividend of 3.1%, but has a slightly better forecast growth rate of 7%. And at just 13 times earnings, Conoco stock is slightly cheaper than Exxon.
My favorite of these three oil stocks, however, is BP. It trades at just 13 times earnings, like Conoco, and pays a a lot of better dividend yield of 5.7%. Earnings growth should be huge next year — as much as 57% — as BP rebounds from a weak 2024. And the British oil major boasts strong free cash flow of $16.3 billion, more than twice its reported net income.
Call me an Anglophile, but I like BP stock better than Exxon or Conoco stock right now.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BP. The Motley Fool has a disclosure policy.
Why ExxonMobil, ConocoPhillips, and BP Stocks Fell Today was originally published by The Motley Fool
