Oil Prices Just Crossed $100 Again. Here’s What Energy Investors Should Do Next.
The current shock in energy markets is lasting longer than expected. The United States is engaging Iran — physically and through negotiations — to resolve the situation in the Strait of Hormuz and keep energy products flowing to the world economy. Both countries disrupted the flow of oil to try to gain leverage in the conflict, Iran created chaos in the Strait of Hormuz and the United States blocked Iranian ports in retaliation.
In response, crude oil futures have reached $105 per barrel for West Texas Intermediate, while Brent prices have reached $126 per barrel, near a record high. As a result, oil producers in the United States and in unaffected areas have begun pumping more oil out of the ground.
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Here’s what oil above $100 a barrel means for energy stocks, and what investors should do now.
More American production
The biggest takeaway from this battle is that energy companies want to build resources outside the Persian Gulf, the hotbed of conflict. This means mainly North and South America, including the United States, Venezuela, Colombia, and Brazil.
These assets are set to benefit from rising oil prices and are unaffected by the current conflict, but will also likely see more investment to diversify away from the Persian Gulf in the coming years. Not only will the price per barrel increase, but supply from the Americas may also increase. The Trump administration says it is in talks with oil companies to increase production and prevent a supply shock from the Persian Gulf.
What can an investor do about this? The easiest thing to do is to look at the stocks of companies whose production is concentrated in the Americas. These include Diamondback Power (NASDAQ: FANG) again Devon Energy (NYSE: DVN). Diamondback Energy is an oil operator focused almost entirely in Texas, while Devon Energy is spread throughout the U.S. If you’re looking for more oil and natural gas to market — as almost everyone does at this point — then Diamondback and Devon will be some of the most important sources of that expansion.
Time to buy oil stocks?
As of this writing on April 30, both Diamondback Energy and Devon Energy trade at reasonable price-to-earnings (P/E) ratios of nearly 10. This is based on what Wall Street analysts believe companies can earn in net profit (or sometimes adjusted earnings) over the next 12 months. Both stocks are trading up about 40% year to date.
This is much cheaper than broader market estimates, so if you believe oil prices will rise or stay around $100 a barrel, both Diamondback Energy and Devon Energy are likely good buys. However, oil markets are unpredictable, and any resolution of this conflict could lower oil prices, leading both stocks to retrace their gains. These are not stocks for the faint of heart, and any investor should expect volatility as an entry price.
Should you be buying Devon Energy shares right now?
Before buying stock in Devon Energy, consider the following:
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Brett Schafer 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 policy of disclosure.
Oil Prices Just Crossed $100 Again. Here’s What Energy Investors Should Do Next. was first published by The Motley Fool
