Yesterday was a weird day for the market. The major indices swung to the downside, with the Dow falling nearly 600 points by the close. But this move was just a drop in the bucket compared to the plunge in crude oil prices. U.S. crude oil per barrel (for May contracts) plummeted more than 300% to negative $37.63 per barrel.
That’s right. For the first time ever, oil producers had to literally pay the refinery and pipeline companies to buy their oil. For anyone who wondered how low oil prices could go, well, apparently, they could go so low they fell through the floor.
If you’re confused about what happened and what this means, that’s completely understandable. Again, this has never happened before. We might as well be living in the twilight zone!
So, in today’s Market360 article, I want to help clear up some of that confusion. This is a tense time, so to help lighten the mood I’m going to break this issue down with a classic scene from a classic Disney movie: Fantasia’s Sorcerer’s Apprentice. After all, who isn’t a fan of the Disney classics?
Now, in Sorcerer’s Apprentice, Mickey Mouse works as, well, the sorcerer’s apprentice. Part of his job is to use a bucket to scoop water out of a fountain and put it in a well. In our case, the water is the oil and the well is the oil reserves. Everything is just fine and dandy until too much water is put in the well and the well starts to overflow. There’s nowhere for the water to go.
That’s what’s happening with U.S. crude oil right now. Of course, we don’t have to worry about sorcerers or oil flooding the streets, but the reality is that the world is awash with oil. Remember, due to the stay-at-home orders very few people are driving or flying, so demand for oil has plummeted.
And oil companies can’t pump their way out of it, since operations are so expensive, and the problem is with no demand. The reality is the oil business is a costly one, especially for oil and gas companies. In boom times, they’re eager to pump more oil – which typically requires taking on debt. The company then becomes highly leveraged at higher oil prices.
That’s a big problem when oil prices are negative.
Despite the thrashing the energy sector has taken, some of the big oil companies have held up relatively well these past two trading days. However, this had little to do with their fundamentals and more to do with their big dividends.
Take Exxon Mobile Corporation (XOM), for example. The stock offers a solid 8.45% dividend yield, but earns an F-rating in my Portfolio Grader. And given the horrific fundamentals, it’s not hard to see why.
Sales and earnings growth have been weak. Earnings have declined over the past couple of quarters. For the fourth quarter, earnings fell 11% year-over-year to $1.33 per share, versus the $1.50 earned in the fourth quarter of 2018. Looking forward to the first quarter of 2020, analysts are estimating earnings of just $0.10 per share, an 81.2% decline from earnings of $0.55 per share earned in the first quarter of 2019. Sales are also expected to fall 15.8% year-over-year to $53.6 billion.
Other big oil companies like Chevron Corporation (CVX), BP p.l.c. (BP), Occidental Petroleum Corporation (OXY) and Schlumberger Limited (SLB) also are seeing major earnings and sales declines and score a D- or F-rating in Portfolio Grader.
Now, I am not a big fan of the energy sector and have very limited exposure to it. In my Platinum Growth Club Model Portfolio, I own just one oil & gas midstream company (which jumped 9% yesterday). Midstream and/or terminal businesses are impacted by the volume of energy (oil, natural gas, etc.) running through the pipelines, not the price of energy. They should only be hurt if they would start capping wells. This particular company remains a lucrative business, and, unlike the big oil companies, its earnings and sales are expected to grow year-over-year.
All that said, there are ways to play the crude oil glut right now: the crude-oil tankers that transport this oil by sea. Given the lack of storage on land, the “day rates” for these tanker companies are going up. I’m so bullish on oil tanker companies right now that I’ve recommended three across my Navellier services. As an elite Platinum Growth Club member, you can have access to all of them. (Sign up here for all the details.)
As a growth investor, it’s all about following the silver lining critical path and investing in the crème de la crème. These oil tanker companies are just a few of them. In my exclusive Platinum Growth Club Model Portfolio, there are 47 stocks across a wide range of industries, hand-picked by me, that are the best of the best. For all the names, as well as my newest oil tanker recommendations, click here.
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