Prior to WTI or Brent oil price plunged below US$20, I asked my broker how can I invest directly in oil. My broker introduced United States Oil Fund (USO) listed in NYSE. You need to declare W8-BEN to invest in US stocks. Please check more with your broker. My friend also asked me, so I did my research, and realized that USO is only good for short term investment or trading. Therefore, I refrain from investing USO for now. In the last section of this post, I will also explain more about USO. For now, I will introduce some alternative Oil and Gas counters
EXXON MOBIL (XOM)
In fact, prior to that, I already purchased Exxon Mobil (XOM) which is my stock on watchlist. Refer to March post here which I indicated XOM in part of my watchlist:
Unfortunately, I did not invest during the low of $30s per share. Two reasons: First, I am bad in timing, and second, I felt it is too risky back then when the crisis just started. Instead, I nibbled at low $40s per share which I reckon it is still relatively cheap considering its peak is >$90 and average pricing of XOM is above $70 for the past 5 years. Current price is $47.5. If price drop below $40, I will accumulate more.
XOM is one of the largest Oil companies in the world with a Revenue of >US$250 Billions. Its cash position is also one of the strongest. Earnings in 2017-2018 is US$20B on average and 2019 earning fall to US$14B. Dividends per share are typically around 4-5% in the past, with last year’s dividend at $3.48 per share which translate to 7.3% based on current price.
With less than $20 oil compared to $60 per barrel in previous years, earnings will decline significantly ahead. That said, it’s not going to be 1/3 the earnings just as the price of oil. This is due to the fact that XOM is diversified into refineries and chemical products aside from upstream oil and gas exploration business. While XOM rising debt to $47B in 2019 is a concern, it is not uncommon in the industry and XOM leverage levels are much lower than most of its peers. XOM also generates cash flows of $30B from operation in 2019, and FCF of $6.6B after spending. It has $3B in cash but since its debt to capital ratio is below 20%, it has ample room to borrow more.
Nonetheless, it is expected that dividend payouts going forward will decline with decreasing earnings if oil continue to be depressed. But, if you believe Oil will recover back to the $60 over the longer term, XOM is definitely worth a look.
ALTERNATIVES TO XOM IN NYSE
Other Oil and Gas majors worth considering if not XOM, includes: Chevron Corp (CVX), Royal Shell Dutch (RDS.B shares normally without withholding tax) and ConocoPhillips (COP).
Otherwise if you think a single stock is not diversifying sufficiently, you can also look into Energy ETF (XLE) or Oil and Gas Exploration ETF (XOP) which comprises of baskets of Oil and Gas companies.
SINOPEC (HKG: 0386)
Another stock I invested recently is China Petroleum & Chemical Corp (or Sinopec) listed in Hong Kong Stock Exchange. Sinopec is owned by Sinopec Corp (or CPC – China Petrochemical Corp), the largest Oil refinery company in the world, stated owned in China.
Sinopec is more in the downstream business focusing on refining, chemicals, lubricants etc, with a lesser extent of its earnings from upstream exploration. 2019 income is US$420B with earnings before tax of US$12B. Net cash flow from Operation is US$22B in 2019, US$25B in 2018. Annual dividend to be payout in Jun 2020 is HK$ 0.3387 which translate to 8.6% dividend at current price of HK$3.93. Alternative to Sinopec are PetroChina or CNOOC which are also state-owned giants listed in HKSE.
If you believed in China economy on top of the possible oil recovery in the long-run, then these three companies are worth delving into.
WHY NOT SGX OIL AND GAS STOCKS
Personally, I will also stay away from Oil and Gas stocks listed in SGX. This is because most Oil and Gas companies listed in SGX are second or lower tier companies below the Oil and Gas value chain. Oil majors and state-owned oil producers like those aforesaid are at the top of the value chain. In an oil crunch, they will normally pass on the “pain” of low oil margins to their contractors and subcontractors, negotiating for rock-bottom contract pricings.
Two major O&G caps in SGX are Keppel and Sembcorp marine. Since the Oil Crisis in 2015, Keppel Corp has only a small portion of its earnings in Oil and Gas with low demand for Oil Rigs and specialized Offshore Oil and Gas related vessels or equipment. Likewise, Sembcorp Industries’ subsidiary Sembcorp Marine is also struggling in the past 4-5 years. Even if they manage to win orders, margins are often squeezed by their clients who are either oil majors or rig or vessel owners. Furthermore, clients of Keppel and Sembcorp Marine will be very cautious in any new investments in this environment. The rest of companies within the industry are mostly in the Offshore support or oil and gas equipment related companies that belong lower in the value chain, who will suffer even more in terms of revenue and profit margins.
WHY NOT USO
USO is an exchange-traded product fund listed in NYSE. You can google more about USO, and lately I also saw several bloggers already explained what is USO is NOT advisable to buy now if you are considering long term investment. I will explain briefly here as well.
USO seeks to replicate performance of WTI light, sweet crude oil, less fund expenses. The fund invests in future contracts, as opposed to physical product of oil. The futures curve of the WTI will drag or drift the price of USO!
- Negative Drag (Contango) – Price Front Month (May) < Back Month (Jun, July, Aug etc)
- Positive Drift (Backwardation) – Price Front Month (May) > Back Month (Jun, July, Aug etc)
What happens last week was a huge contango which drag USO down. The near future of oil is still very bearish and hence contango is still expected. The USO fund has to roll many contracts to the forward month incurring losses, which makes buying of USO for long term investment unfavorable.
Refer also to my previous article : Negative Oil Price – what it means? And how come Exxon or Shell share price did not fall as much? How about Keppel and Sembcorp?
Oil price is at historical low. If you think the world will still eventually demand for more oil, and price of oil will recover in the long run, then you can possibly invest in oil stocks. But be very cautious because and consider the risk and reward factors carefully.
Refer to my earlier article: Wall Street Vs Main Street (Part 1) – Irrational Exuberance
It is unclear when the Corona crisis will be over. And as long as the virus is still considered pandemic, global demand will be drastically affected resulting in a permanent decline in the demand of oil.
I had considered the risk and reward myself based on my financial portfolio, and reckon that nibbling at XOM and Sinopec makes sense.
How about you?