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Oil stocks suffered a third straight day of falling share prices on Friday, with oil majors ExxonMobil (XOM -0.70%) and Chevron Corporation (CVX -1.36%) and pipeline operator Enterprise Products Partners (EPD -1.49%) all dropping sharply in early-morning trading. As of 10:50 a.m. EST, Exxon stock remains down 1.6%, Chevron has lost 1.8%, and Enterprise Products stock is down 2.4%.
Tumbling oil prices were the cause.
After falling through the early part of December, oil prices started to rebound last week, with WTI crude topping out at $77.67 a barrel midday Wednesday. Then that trend reversed.
Today, WTI is down another 2.4% at $74 and change, and Brent crude, the international benchmark, is down a similar amount — 2.5% — according to data from OilPrice.com.
Oil’s recent weakness has multiple causes. Central banks for the European Union, the United Kingdom, and the United States all raised interest rates this week, with the Federal Reserve in particular hiking only the expected 50 basis points but telegraphing its intention to raise rates as high as perhaps 5.5% in the new year — and not start cutting rates again before 2024.
This near-unanimous agreement by central banks around the world to raise rates in order to slow economic growth and restrain inflation has investors increasingly concerned that a recession is coming — and that it’s going to be global in scale, depressing demand for oil everywhere. Reinforcing this view, in China in particular, Reuters reported yesterday that retail sales and factory output both declined at the fastest rate in six months in November, missing government forecasts in the process.
Granted, Reuters blamed China’s zero-COVID policies for the slowdown — and China has already begun rolling back those policies. But if the momentum of the Chinese economy is already downward, it will take some time to reverse that. One analyst cited in the Reuters report, Natixis chief economist of Asia-Pacific Alicia Garcia-Herrero, warned that China’s “December data might be even worse” than November’s and that there could even be “a big collapse in industrial production in December.”
So the news right now doesn’t look so great for oil demand. This, in a nutshell, is why oil stocks are down today. If you look past the near-term gloom, however, and agree that over the long term, a world with 8 billion inhabitants (and growing) is probably going to need more energy in the future, rather than less, then cheaper oil stocks aren’t necessarily a bad thing.
Priced at just 9.8 times trailing earnings (Chevron), 10.5 times (Enterprise Products), or even 10.6 times (Exxon) and paying generous dividends (Chevron is the stingiest at 3.3%, while Enterprise Products pays a walloping 7.9%), all three of these energy companies look cheap based on historical multiples. Additionally, the lower their share prices go, the higher their dividend yields (the absolute amount of dividend dollars they pay divided by their share prices) rise. Ultimately, this should tend to attract new dividend investors and thus support their share prices over time.
Even if the world is heading into a recession that will depress oil demand, I actually think these oil stocks might end up being a pretty good place to ride out that recession.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
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