The price of West Texas Intermediate crude oil has climbed well above $100, and crude oil prices are much higher worldwide.
Energy producers in the United States will thrive as production increases and oil prices rise.
Devon Energy and Diamondback Energy look like good operators centered in North America.
The current shock to energy markets is lasting much longer than expected. The United States is tussling with Iran — both physically and through negotiations — to work out the situation in the Strait of Hormuz and keep energy products flowing to the global economy. Both countries have disrupted the flow of oil to try to gain leverage in the conflict, with Iran enacting chaos in the Strait of Hormuz and the United States blockading 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, close to a record high. In response, oil producers in the United States and in unaffected areas have begun pumping more crude from the ground.
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Here’s what oil over $100 a barrel means for energy stocks, and what investors should do now.
Image source: Getty Images.
The big takeaway from this war is that energy companies want to build supply outside the Persian Gulf, a hotbed of conflict. This mainly means in North and South America, including the United States, Venezuela, Colombia, and Brazil.
These assets are set to benefit from rising oil prices and are not affected by the current conflict, but will also likely see more investment to diversify away from the Persian Gulf in the years ahead. Not only will the price per barrel rise, but the supply coming from the Americas may rise as well. The Trump administration says it is in discussions with oil companies to increase output and buffer the supply shock from the Persian Gulf.
What can an investor do about this? The easiest thing to do is look at stocks of companies with production centered in the Americas. These include Diamondback Energy (NASDAQ: FANG) and Devon Energy (NYSE: DVN). Diamondback Energy is an oil operator focused almost entirely on Texas, while Devon Energy is spread across the entire U.S. If you want more oil and natural gas coming to market — as nearly everyone does at this moment — then Diamondback and Devon are going to be some of the key sources for that increase.
As of this writing on April 30, both Diamondback Energy and Devon Energy are trading at reasonable forward price-to-earnings (P/E) ratios of approximately 10. This is based on what Wall Street analysts believe the companies can earn in net income (or sometimes adjusted earnings) over the next 12 months. Both stocks are trading up around 40% year to date.
This is much cheaper than the broader market averages, so if you believe oil prices will either rise or stay around $100 a barrel, both Diamondback Energy and Devon Energy are likely to be good buys. However, oil markets can be unpredictable, and any resolution to this conflict could bring oil prices lower, leading both stocks to give back their gains. These are not stocks for the faint of heart, and any investor should expect volatility as the price of admission.
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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 disclosure policy.
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