After missing out on the 2019 rally that led to the S&P 500 rising by over 20%, energy stocks are lagging for two main reasons. Excess supply from the Middle East continues to weigh on oil prices. And the U.S.-China trade tensions limit any positive expectations for the global economy. So, with major oil companies still in the red in the last year (and barely up YTD), why buy energy stocks?
Oil prices are too low. Eventually, a higher supply draw and seasonal strength from the cold fall and winter period in North America will increase demand. BP plc (NYSE:BP) and Exxon (NYSE:XOM) are the vertically integrated firms that will profit the most as prices improve.
The latest Fed interest rate cut will encourage investors to seek dividend-income growth. BP and XOM stock has a generous dividend yield that is covered by strong cash flows. But although BP reported a surprise third-quarter loss, XOM stock double-bottomed in recent weeks.
BP’s $2.6-billion one-time charge-offs is a cleanup in its balance sheet. Its prospects are positive. Replacement cost profit topped the $1.73-billion forecast. With lower maintenance costs and a resumption in Gulf of Mexico production, revenue will improve from here.
Disclosure: The author owns BP stock.
