Recent Oil Trends Create Investment Opportunities

The combined effects of the financial crisis, the slow economic recovery, the slowdown of the Chinese growth rate and the recent fall in oil prices have strained the finances of many companies.

Since the start of the crisis over Ukraine, oil prices have tumbled for over $100 to less than $50 in a matter of months. During that period, Saudi Arabia has refused to heed calls from other OPEC nations to cut production and prop up prices. The lower prices have negatively impacted the value of the inventory held by oil companies around the world. Some small operators were obliged to seek outside financing to offset the losses.

Oil Prices

Oil prices

Source: CME Group

Recent events including the rise in instability in the middle-east have stopped this downward trend. Trouble in Yemen, Libya, and Syria raised fears about the security of supply and drove prices higher. After reaching a floor around $46.50, oil prices have risen rapidly since the second half of March to almost $63. This sudden rise might be setting a direction towards a pricier barrel which would help reduce strain over oil companies.

In a context of a strengthening US economy and a buoyant stock market , oil companies stocks are set to rise again after their recent decline if oil prices resume their upward trend. At this point opinions are mitigated as to where the oil price might be headed. Some talk of rebound and others of a simple correction.

S&P 500 index

S&P 500

Source: Yahoo Finance

However if oil price dive again oil stocks will probably continue their descent as was the case in 2014 and in the recent weeks. Stock prices of EXXON, ConocoPhillips and Chevron have all three followed this pattern. They have recorded plummeting sales and margins.

Only EXXON showed an uptick in its 2014 net income margin compared to the previous year but not enough to regain the levels seen in 2012 and 2013. Of the three, it holds the lowest margin levels. ConocoPhillips has a net income margin of 12% compared to less than 10% for the two others.

Understandably the stock is dearer is terms of price-to-earnings with a ratio of 12.20 against 11.60 and 10.65 for EXXON and Chevron respectively. In terms of price alone ConocoPhillips has been more resilient during the previous year than both its competitors which lost 7.45% and 10.19% against only 2.45%.

The company has stepped up investment and exploration expenses which might provide additional revenue in the future. It might be a profitable pick if oil prices rise further. Additionally it also offers the highest dividend yield at 4.22% and an expanding payout with an average growth rate of 7.56%.

However if oil prices decline Chevron would serve as a great shorting opportunity since it has been on the fall since last year when it recorded -10.19% and -3.77% in the first four months of 2015.