Investing in oil has long been a way that some people strike it rich. In addition to hitting black gold, some people have done well by putting money in oil stocks or simply oil, the commodity itself.
Investing in a commodity that people use regularly is not a bad idea. Given oil’s natural cycle, the price of crude dips lower periodically, making for a good potential buy-in. But, this is investing and there are no guarantees.
Make sure you understand what you are getting yourself into before you ante up.
Pros and Cons of Buying Oil Stocks
Investing in oil futures is how most people invest in oil directly.
The payoff can be huge but futures are extremely volatile. You can also expect to put up more capital than if you were just investing in equities.
Instead of going through all that you could put your money in oil stocks instead.
They tend to move in alignment with the price of oil, but they are less volatile and require less of an investment than a commodity would.
In general, they tread water when oil is down. Then, when it goes up, these companies benefit from extra cash flow and higher profits.
As Achilles Research explains, “The higher oil prices climb, the bigger the earnings and free cash flow impact.”
The downside here is that you are still vulnerable to the way the company is managed. Too much debt, opportunities for profit, and the amount they pay in dividends all figure prominently.
Is Exxon Stock A Buy or a Sell?
In 2016, a primary reason to invest in the Exxon Mobil Corporation was its dividend.
It was trading at $79 when The Street wrote that the share price was only up because crude prices were high and the stock was outperforming other companies in the sector.
The share price did rise since that article was published but it has also settled to levels that are lower than it was then.
Exxon Mobil has traded in a 52-week range of $72.16 to $89.30. At the time of writing, its price-to-earnings ratio is 13.98.
Consensus estimates put the stock at $88.13 in one year. It also has a forward dividend yield of 4.22%. Exxon Mobil has a forward PE of 13.97.
That said, there are lots of reasons to be excited about what will happen next for the company – around one billion to be exact.
Exxon recently upgraded its yield estimates for its investments off the coast of Guyana to 5 billion barrels from 4 billion.
And this new finding is only the beginning.
Exxon Mobil (NYSE: XOM) is highly-diversified. It has assets around the world and it uses a variety of offshore and onshore drilling.
Exxon Mobil (NYSE: XOM) is also sitting well with regard to its operations. The company does a lot more than drill. It has solid upstream and downstream businesses.
The company is also low on debt. It’s a solid combination that tends to deliver as part of a balanced portfolio.
Should You Buy or Sell BP?
BP (NYSE: BP) trades at 15 times its current earnings. It has a 52-week range of $36.15 to $47.83. The one-year target estimate is $50.86, and the forward dividend is 6.23%. BP’s forward PE is 10.33.
With prices so low, there are several reasons to be excited about BP.
The company has been increasing its oil production. In July 2018, the company announced that it was in the process of buying shale assets worth $10.5 billion from BHP Billiton (NYSE: BHP).
This move will boost BP’s onshore assets in the United States by 57%.
While the company is still paying for cleanup expenses, it seems to be in a good position to handle the extra costs now.
Immediately after the ruling, BP (NYSE: BP) had to make a series of divestments to make ends meet, even provoking rumors of that it was a takeover target – but that’s largely behind them.
“In recent times we have divested a number of refineries, but our current focus is on eight refineries around the world that are really world class in terms of their operations and complexity,” says BP Chief Scientist Angela Strank. “We’ve improved the reliability of our assets, and turned around our petrochemicals business to be resilient at any point in the cycle which maybe it wasn’t in the past.”
Right now, its free cash flow is exceeding its costs for spill damages.
Finally, there is BP’s ability to manage operations well. Oil spill aside, the company had “lifting costs that were “best-in-class” during 2017 and it achieved greenfield costs that were under $5 per barrel during its recent projects in Oman.
Conclusion: Which Stock Is Best?
Each one has solid opportunities for growth and a structure that suggests they can make the most of those advantages.
They both also offer a strong dividend, which can be a major benefit depending on how you choose to structure your portfolio. For investors looking to put their money in oil stocks, these are two strong possibilities. It just depends on how they fit as part of your broader investment strategy.