In this article, we discuss the 10 oil stocks to sell before the recession begins. If you want to skip our analysis of the outlook on the oil prices, go directly to the 5 Oil Stocks to Sell Before 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).
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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.
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Disclose. None. 10 Oil Stocks to Sell Before Recession Begins is originally published on Insider Monkey.
