In this article, we discuss the 10 oil stocks to sell before the recession begins.
In a report issued by Citigroup earlier in July, analysts Francesco Martoccia and Ed Morse shared their stance on the fluctuations in oil demand. The analysts stated that the global crude oil prices could plummet to $65 per barrel by the end of 2022 and then further to $45 per barrel by the end of 2023 in case of a recession. The price forecast is made on the assumption that no production cuts will be made by the members of the OPEC+ in response to the plummeting prices and there would be a decline in oil investments. As of July 7, Brent crude futures was trading around $104.35, and the West Texas Intermediate (WTI) contract for August 2022 delivery was trading at $100.67 per barrel. The Head of commodity research at Citigroup, Mr. Ed Morse, has been cautious about the outlook of crude oil prices for the past few months. He thinks that crude oil is significantly overpriced right now and should trade around the $70 per barrel level.
In the past, OPEC members and its allies have intervened to avoid a significant dip in crude oil prices. In April 2020, at the peak of the COVID-19 pandemic, OPEC+ members reached an agreement to cut crude oil production by 10 million barrels per day (bpd), or nearly 10% of the global supply in one go. This was the biggest cut in production ever agreed between the notable oil producers of the world. The situation is different this time around as the Middle Eastern domiciled oil organization and its allies have started to increase crude oil production again and intend to raise it by 648,000 bpd in July and August. In the last two months, production has increased by 400,000 bpd to 432,000 bpd every month. The cartel will meet again on August 3 to decide the way forward.
Many oil-producing countries depend upon proceeds generated by crude oil to run their finances. This could result in a deadlock and flood the market with excess supply at a time when there would be a demand crunch. The report issued by Citigroup has taken into consideration various crises in the oil market dating back to the 1970s.
Investors are concerned that the central banks’ aggressive increase in interest rates to combat the rapidly increasing price levels can dampen consumer demand and tilt the global economy towards a recession. Excess supply coupled with a decline in demand would be the perfect recipe for plummeting oil prices. Such an economic situation is expected to adversely impact many oil stocks, including notable names such as Chevron Corporation (NYSE:CVX), Occidental Petroleum Corporation (NYSE:OXY), and Exxon Mobil Corporation (NYSE:XOM).
Photo by Zbynek Burival on Unsplash
Our Methodology
The world is bracing for a severe recession in the months to come, and oil prices have already started to decline on the fears that economic activity will slow down, causing a demand crunch. In this backdrop, we have picked some oil stocks that recently received bearish analyst ratings and are at the risk of losing some value amid volatility in the energy markets.
Oil Stocks to Sell Before Recession Begins
10. TotalEnergies SE (NYSE:TTE)
Number of Hedge Fund Holders: 20
Stock Price as of July 7: $51.15
TotalEnergies SE (NYSE:TTE) is a French integrated oil and gas company focused on reducing the contribution of revenue from oil products from 55% to 30% by the end of this decade. The sixth-biggest oil and gas corporation globally is moving towards renewable energy sources.
The sentiment on the Street is turning bearish on TotalEnergies SE (NYSE:TTE) stock. During Q1 2022, Paulson and Company closed its position of 460,000 shares in TotalEnergies SE (NYSE:TTE), which was opened in Q2 2021. Due to the rising crude oil prices, the company has been forced by the French government to give out a discount of 0.12 euros (13 cents) per liter from July 1 to August 31. This will be in addition to the 0.18 euros (19 cents) per liter subsidy being provided by the French government. This discount is estimated to benefit 17 million people in France but will significantly hurt the bottom line of TotalEnergies SE (NYSE:TTE) during Q3 2022.
TotalEnergies SE (NYSE:TTE) was held by 20 hedge funds as of Q1 2022.
9. Shell plc (NYSE:SHEL)
Number of Hedge Fund Holders: 37
Stock Price as of July 7: $48.60
Shell plc (NYSE:SHEL) is a London-based oil and gas company. The shale boom in the US did not play in favor of the European supermajor as the oil market was flooded with excess supply from 2014 to 2020, which caused depressed crude oil prices during this period. This caused oil companies like Shell plc (NYSE:SHEL) to cut down capital expenditure on crude oil exploration and production (E&P) activities, and as a result, new developments did not take place at the same rate to meet the anticipated increase in demand. The wells found during the shale boom cannot maintain or increase production like the traditional wells and experience a 70% to 80% decline after their initial two years. Due to these developments, OPEC+ is facing challenges in keeping with the higher demand for crude oil globally.
Between 2010 and 2021, Shell plc’s (NYSE:SHEL) oil and gas reserves have fallen significantly, and the company’s oil production has also seen a decline. This trend can be expected to continue due to Shell plc’s (NYSE:SHEL) low CAPEX and investment in exploration.
Shell plc (NYSE:SHEL) was held by 37 hedge funds as of Q1 2022.
8. Schlumberger Limited (NYSE:SLB)
Number of Hedge Fund Holders: 58
Stock Price as of July 7: $33.33
Schlumberger Limited (NYSE:SLB) is a Houston, Texas-based oilfield services company.
If the forecast provided by Citigroup comes true, Schlumberger would be strongly impacted by the decline in crude oil prices. A decline in oil investments would mean lower E&P activity, which will not play in Schlumberger Limited’s (NYSE:SLB) favor. The company has been forced to exit the Kurdistan region in Iraq following an order from the Iraqi Supreme Court. The Supreme Court had declared the independent oil and gas industry in Kurdistan illegal and issued an order to the Kurdistan Regional Government (KRG) to give back all the assets to the Federal Government in Baghdad. On June 21, J.C. O’Hara, Chief Market Technician at MKM Partners, highlighted that compared to the WTI crude, energy equities were facing double selling pressure and highlighted Schlumberger Limited (NYSE:SLB) as one of the stocks that have downside risks.
Schlumberger Limited (NYSE:SLB) was discussed in the Q2 2021 investor letter of ClearBridge Investments. Here’s what the firm said:
“Schlumberger is a leading oilfield services company that should enjoy both cyclical and secular opportunities over the next market cycle and beyond. On the cyclical front, after years of declining energy service activity and negative pricing, service activity is increasing modestly and pricing is inflecting higher, which is always the key cyclical driver for energy services stocks. In addition, we expect the Middle East to gain share of oil production as ESG considerations limit upstream investment in other regions. As the dominant service provider in the Middle East, Schlumberger is very well-positioned for this shift. On the secular front, Schlumberger has a rapidly growing digital services capability that helps producers operate much more efficiently and with much less waste, which will be a core ESG focus. Finally, Schlumberger is investing directly, and with partners, in energy transition capabilities such as carbon capture, hydrogen and geothermal that should allow Schlumberger to grow and remain viable well beyond the current energy cycle.”
Out of the 912 hedge funds in Insider Monkey’s database, 58 funds held a stake in Schlumberger Limited (NYSE:SLB) as of Q1 2022.
7. BP p.l.c. (NYSE:BP)
Number of Hedge Fund Holders: 27
Stock Price as of July 7: $27.15
BP p.l.c. (NYSE:BP) is another British oil major on our list and one of the seven biggest oil and gas companies in the world.
BP p.l.c. (NYSE:BP) has been heavily impacted by the Russia and Ukraine conflict as it has been forced to exit its 19.75% investment in Rosneft. This could result in a financial hit of up to $25 billion. Before the exit, BP p.l.c. (NYSE:BP) was the biggest investor in Russia. This move also reflects the pressure that Western governments are applying on the companies to sever business ties with Russia. BP p.l.c. (NYSE:BP) was operating in the Russian market for the last three decades and acquired the stake in Rosneft for $12.5 billion in 2013. Susannah Streeter at Hargreaves Lansdown thinks it will be very challenging for the oil major to recuperate the full value of its investment.
BP p.l.c. (NYSE:BP) was held by 27 hedge funds as of Q1 2022.
6. Diamondback Energy, Inc. (NASDAQ:FANG)
Number of Hedge Fund Holders: 47
Stock Price as of July 7: $114.14
Diamondback Energy, Inc. (NASDAQ:FANG) is a Midland, Texas-based crude oil and natural gas E&P company.
Diamondback Energy, Inc. (NASDAQ:FANG) finished Q1 2022 with long-term debt of $5.80 billion. This translates into total debt to equity ratio of 45.89%. At a time when interest rates are rising to combat the impact of record multi-decade high inflation, companies such as Diamondback Energy, Inc. (NASDAQ:FANG), having significant leverage, would have to bear the burden of higher financing costs. The higher cost of financing will hurt the free cash flow (FCF).
Diamondback Energy, Inc. (NASDAQ:FANG) announced on June 21 that it intends to distribute 75% of its FCF to its investors through base plus variable quarterly dividends and an opportunistic share repurchase program. However, the total dividend outlay was fixed at $3.05 per share. As the oil prices decline, companies like Diamondback Energy, Inc. (NASDAQ:FANG) would see their cash inflow declining. Hence, investors are discouraged from investing in stocks that offer an income potential only in the short term.
As of Q1 2022, 47 hedge funds reported owning a stake in Diamondback Energy, Inc. (NASDAQ:FANG).
In addition to Diamondback Energy, Inc. (NASDAQ:FANG), stocks such as Chevron Corporation (NYSE:CVX), Occidental Petroleum Corporation (NYSE:OXY), Exxon Mobil Corporation (NYSE:XOM) are also facing the brunt of the adverse economic environment.
5. ConocoPhillips (NYSE:COP)
Number of Hedge Fund Holders: 67
Stock Price as of July 7: $84.64
ConocoPhillips (NYSE:COP) is a Houston, Texas-based oil and gas E&P entity.
Crude oil prices declining to $45 per barrel could be disastrous for the company. The price will be in touching distance of the $40 per barrel breakeven required by ConocoPhillips (NYSE:COP) to generate $7.5 billion for maintaining production and securing dividends. ConocoPhillips (NYSE:COP) can generate $3 billion in excess cash only if crude oil prices remain above the $50 per barrel level.
In May, it was also reported that Timothy Leach, the Director & Advisor at ConocoPhillips (NYSE:COP), sold a stake worth $4.2 million in the company at a price of $102 per share. The decline of 5.7% in Leach’s holding resulted in the investors being concerned over the future outlook on ConocoPhillips (NYSE:COP). The company has seen substantial inside selling in the last three months.
ConocoPhillips (NYSE:COP) was mentioned in the Q1 2022 investor letter of ClearBridge Investments. Here’s what was said about the company prior to the decline in oil prices:
“The energy sector, which led a strong market in 2021, generated even more dramatic relative performance in the quarter, advancing 39% and leading the benchmark Russell 1000 Value Index. Years of restrained investment in the energy sector, combined with a strong post-pandemic recovery, contributed to the higher commodity prices. The upward pressure escalated with the Russian invasion of Ukraine. Our energy holdings ConocoPhillips (NYSE:COP) benefited from higher commodity prices and was among the top contributors to first-quarter performance.”
ConocoPhillips (NYSE:COP) was held by 67 hedge funds at the end of Q1 2022.
4. Chevron Corporation (NYSE:CVX)
Number of Hedge Fund Holders: 53
Stock Price as of July 7: $142.66
Chevron Corporation (NYSE:CVX) is a San Ramon, California-based integrated oil company. The company is in the process of shifting its headquarters to a new location in California to fulfill the requirements of the employees situated in the headquarter. Chevron Corporation (NYSE:CVX) will also cover the shifting costs for employees who select the Houston facility in Texas, where the upstream segment is based.
Crude oil prices falling to $45 per barrel by the end of 2023 could cause Chevron Corporation (NYSE:CVX) to record a loss. The company needs a $50 per barrel crude oil price to break even. In a note issued on July 1, Jason Gabelman at Cowen lowered the price target on Chevron Corporation (NYSE:CVX) from $179 to $160. This has restricted the potential upside from 25.4% to 12.1% only. The analyst slashed the target price in anticipation of underwhelming Q2 2022 results. Although Gabelman expects the company’s earnings per share (EPS) to be in line with consensus estimates, he thinks Chevron Corporation’s (NYSE:CVX) free cash flow results will miss estimates for the second quarter.
Here’s what Carillon Tower Advisers said about Chevron Corporation (NYSE:CVX) in its Q1 2022 investor letter:
“Along with the spike in oil prices, energy stocks performed best during the quarter, followed by more defensive and countercyclical sectors like utilities and consumer staples. Chevron (NYSE:CVX) traded higher with global energy prices. The war in Ukraine prompted fears over a shortage in supply, resulting in higher commodity prices.”
Chevron Corporation (NYSE:CVX) was held by 53 hedge funds at the end of Q1 2022.
3. Marathon Oil Corporation (NYSE:MRO)
Number of Hedge Fund Holders: 43
Stock Price as of July 7: $21.13
Marathon Oil Corporation (NYSE:MRO) is a Houston, Texas-based crude oil and natural gas E&P company.
On June 24, Scott Gruber at Citi downgraded Marathon Oil Corporation (NYSE:MRO) stock from a Buy to a Neutral rating and slashed the target price from $31 to $24. The revised target has restricted the potential upside from 46.7% to 13.5% only. The analyst has downgraded Marathon Oil Corporation (NYSE:MRO) stock because he does not anticipate a rally in stock price associated with a rally in crude oil prices. Crude oil prices are expected to remain range-bound or even fall due to a possible risk of a global recession. The analyst recommends investors take a more selective approach toward the E&P industry stocks and highlights that the valuations always appear “cheap at the peak.”
Two Sigma Advisors and D E Shaw reduced their holding in Marathon Oil Corporation (NYSE:MRO) by 29% and 38%, respectively, during the first quarter of the year.
Here’s what Carillon Tower Advisers said about Marathon Oil Corporation (NYSE:MRO) in its Q1 2022 investor letter:
“Stock selection contributed the most while sector allocation was also positive. An underweight to communication services and an overweight to energy helped performance, while an underweight to consumer staples and an overweight to materials detracted. Stock selection was strong within healthcare and materials but was weak within information technology and industrials. Marathon Oil (NYSE:MRO) increased its quarterly dividend and executed an impressive share buyback that blew by the target it originally announced.”
As of Q1 2022, 43 funds held a stake in Marathon Oil Corporation (NYSE:MRO).
2. Occidental Petroleum Corporation (NYSE:OXY)
Number of Hedge Fund Holders: 67
Stock Price as of July 7: $59.11
Occidental Petroleum Corporation (NYSE:OXY) is a Houston, Texas-based oil and gas E&P company.
Although Occidental Petroleum Corporation (NYSE:OXY) has been receiving great attention from Warren Buffet’s Berkshire Hathaway Inc., the consensus forecast is that the company will see an 11.6% decline in revenue growth in FY23. This will be followed by a further 7.6% decline in FY24. JR Research predicts Occidental Petroleum Corporation (NYSE:OXY) to underperform the market over the next four years.
On June 7, Stephen Richardson at Evercore ISI downgraded Occidental Petroleum Corporation (NYSE:OXY) stock from an Outperform to an In-Line rating with a price target of $74. The analyst highlighted that the tailwinds of the stock have already been priced in, and there is limited room for differentiation.
In its Q3 2021 investor letter, Smead Capital Management discussed its outlook on Occidental Petroleum Corporation (NYSE:OXY). Here’s what the firm said:
“Oil stocks dominated our winners for the quarter. We showed that we have unlimited ability to tempt fate by buying into Occidental Petroleum (OXY) this year after it was our biggest loser of 2020. It gained 16.64% during the third quarter.”
At the end of Q1 2022, Occidental Petroleum Corporation (NYSE:OXY) was held by 67 hedge funds.
1. Exxon Mobil Corporation (NYSE:XOM)
Number of Hedge Fund Holders: 83
Stock Price as of July 7: $84.81
Exxon Mobil Corporation (NYSE:XOM) is one of the biggest publicly listed energy companies in the world.
The Irving, Texas-based company anticipates a financial charge of $100 million to $200 million during Q2 2022 to reflect the impact of production loss from Russia. Furthermore, oil companies with a profit margin of more than 10% could be imposed a federal super-tax under a plan formulated by Ron Wyden, a Democrat from Oregon who leads the House Finance Committee. This would mean that Exxon Mobil Corporation (NYSE:XOM) would have to pay 21% more in taxes to the US government in addition to the 21% US corporate tax. Exxon Mobil Corporation (NYSE:XOM) has invested $118 billion in the oil and gas sector in the last five years but has only generated $55 billion of net income during that period.
Saturna Capital shared its stance on Exxon Mobil Corporation (NYSE:XOM) in its Q4 2021 investor letter. Here’s what the firm said:
“Few companies maintain their position at the top for more than a decade or two. One that did was Exxon, which appeared decennially from 1980 through 2010. In 2019 it was ranked 10th, but as of writing has dropped to 39th place.”
Exxon Mobil Corporation (NYSE:XOM) was held by 83 hedge funds as of Q1 2022.
You can also take a peek at The 10 Best Stocks to Buy Now According to Billionaire Paul Tudor Jones and Billionaire Nelson Peltz’s Top 7 Stock Picks.
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Disclose. None. 10 Oil Stocks to Sell Before Recession Begins is originally published on Insider Monkey.
