Just over a year ago, oil was hovering around $110 per barrel. Now it’s struggling to stay above $40. In between, it sunk to a 6½-year low of $38 a barrel.
The free-fall in oil prices have made ‘energy’ the most talked-about sector of the entire market in 2015, apart from the fact that its performance has been the worst. Year-to-date, ‘The Energy Select Sector SPDR’ has posted a loss of 13.5%. On the other hand, the broad-based Dow Jones Industrial Average and the S&P 500 index gained 0.4% and 2.1%, respectively, over the same period.
Currently, crude prices are trading around $41-a-barrel after hitting a new 6-1/2 year low of $37.75 recently. This, despite a short spike that saw the commodity scale a year-high of $61.43 per barrel in June.
As is now widely recognized, the main culprit behind the plunge is a classic case of supply-demand mismatch. Surplus production remains an issue, particularly with the boom in American shale output. At the same time, weak global consumption is set to continue in the short-to-medium term, thanks to Japan, Europe and now China. Finally, a strengthening dollar is holding back ‘black gold’ prices.
As a result, energy stocks have been dead money this year, brutalized by the slide in oil. Most stocks have slipped big time – 30% or more – as the commodity has collapsed and industry profit margins have sagged.
Oil Refiners: Standing Tall Amid the Carnage
Going by the past year’s track record of oil prices, the term ‘energy stock’ probably conjures an image of a sharp fall in share prices and investment dollars going down the drain. However, that isn't necessarily the case – there are a number of companies that are showing strength during this shaky period. In particular, with oil prices cooling off, U.S. downstream (refining and marketing) stocks have been notching up healthy gains and earnings beats.
The business of the downstream players is negatively correlated with crude prices. This is because the companies use oil as an input from which they derive refined petroleum products like gasoline, the prime transportation fuel in the U.S. Hence, lower the oil price, higher will be their profits.
To add to this, robust demand for gasoline (the most widely used petroleum product) has lifted crack spreads and is set to provide further upside to the companies’ bottom line.
Finally, in order to take advantage of the strong gasoline demand and higher margins, the companies are operating their units at record high capacity, sometimes at more than 100%. Therefore, the future looks bright indeed, regardless of their share prices hovering close to 52-week highs.
Top-Performing Industry with a Favorable Zacks Rank
Most of the securities in the oil refining and marketing space is seeing solid earnings estimate revision activity, and is in great company from a Zacks Industry Rank perspective.
A favorable Zacks Rank indicates that these stocks have been witnessing positive estimate revisions which generally translate into rapid price appreciation. The industry performance will add to it, too. Research says that about half the price performance of a stock can be attributed to the industry group that it belongs to.
This is important because, often times, a rising tide will lift all boats in an industry, as there can be broad trends taking place in a segment that are boosting securities across the board. This is arguably taking place in the oil refining and marketing space as it currently has a Zacks Industry Rank #36 – comfortably placing it into the top 1/3rd of the 260+ industry groups – suggesting it is well-positioned from this perspective, especially when compared to other segments out there.
Estimates Rise
Following a good third quarter and sensing a favorable earnings outlook for the fourth quarter of 2015, analysts have been bullish on the sector components. The positive estimate revision activity for 4 such names is provided below.
Murphy USA Inc. MUSA: Murphy USA, a Zacks Rank #2 (Buy), has seen 2 upward estimate revisions versus none in the opposite direction, pushing the fourth quarter Zacks Consensus Estimate up to 85 cents a share from 79 cents over the past 30 days.
Western Refining Inc. WNR: For the to-be-reported quarter, we have seen 4 estimates moving up in the past 30 days, compared with 2 downward revisions. This has caused the Zacks Consensus Estimate for this Zacks Rank #3 (Hold) stock to trend higher, going from 74 cents per share a month ago to its current level of 77 cents.
Phillips 66 PSX: For the three-months ending Dec 31, 2015, the Zacks Rank #3 company has witnessed 5 positive revisions in the past one month, while not a single estimate moved down. Consequently, the Zacks Consensus Estimate for earnings has improved from $1.26 to $1.60.
Valero Energy Corp. VLO: For the current quarter, we have seen 2 estimates moving up in the past 30 days, while there were 2 downward revisions as well. Still, the Zacks Consensus Estimate for the Zacks Rank #3 company trended higher, going from $1.28 per share a month ago to its current level of $1.36.
Bottom Line
With plenty of time before the next earnings release, investors can get in early and earn handsome profits from the above-mentioned stock choices.
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