How These 4 Stocks Track Oil’s Low

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Oil just hit its lowest point this year.  Closing at $91.02 per barrel, oil prices are still up 17.8% from their 52-week low of $77.28.  However, does the downtick in oil represent a new downtrend?

Oil, which is traded as an ETF through the United States Oil ETF (NYSEMKT: USO), largely tracks the S&P 500 in general price direction.  Of course both assets rise or fall in different percentages, but largely both have fallen under the umbrella of the “risk on” and “risk off” trades.  However, I think it’s possible that oil and the broad markets could diverge, with the S&P hovering at or just above 1500 and oil dropping further.

The reason is because the markets are being buoyed by free money from the Fed, while oil typically follows supply and demand characteristics that are heavily influenced by OPEC.  Loose monetary policy definitely influences oil, but the point I’m trying to make is that, unlike other commodities like gold, actions in the Middle East can affect oil prices independent of the Fed.

Should oil prices and the broad stock market diverge, it makes sense to get a basic understanding of how energy stocks are correlating, or trading in lockstep, with oil.  I ran a correlation analysis for four major oil and gas companies to see how they currently correlate with the United States Oil ETF. 

The scale ranges from -1.0 for a perfect negative correlation to +1.0 for a perfect positive correlation.  Finally, I used the past 20 days trading days in the study instead of the default 10 days in order to obtain a smoother data set.  Here are the findings.

1. BP

Correlation: .839

What Could Move the Stock

BP (NYSE: BP) appears to have emerged from its 2010 oil spill in decent financial shape.  Any additional lawsuits could move the stock, but BP has already paid out $10.17 billion to businesses, individuals, and the government.  You can read more about BP’s payouts here.  

I’m impressed with how the company tried to take charges as quickly as possible, so that its stock could recover in the long-term.  Also, I like that BP has a 5.3% dividend, which would only increase if the stock falls in price.

2. Chesapeake

Correlation: .556

What Could Move the Stock

Chesapeake Energy (NYSE: CHK) is highly leveraged and needs to clean up its balance sheet.  I wrote about this in my post “Will Someone Please Clean Up These Dirty Balance Sheets?”  Extreme debt is one reason the company is still off its 52-week high of $26.09, despite the market roaring back.  Look for Chesapeake to continue to shore up its finances and to bulk up its corporate governance efforts.

3. ExxonMobil

Correlation: .024

What Could Move the Stock

Because energy prices are sluggish and capital expenditures are high, Exxonmobil (NYSE: XOM) incentivizes shareholders to hold its stock by paying a 2.5% dividend and by buying back shares.  In regard to share buybacks, I found an article from last May that explains Exxon’s share buybacks quite well:

Ten years ago, Exxon Mobil's net income was around $4 billion. Today the company's net income is near $10 billion. Without stock repurchases, we are looking at an earnings growth of 250% in 10 years, which translates into 25% per year (non-compounded, for sake of simplicity). This is not bad at all, however it gets better when we include stock repurchases into the calculation. Ten years ago, Exxon Mobil had 6.78 billion outstanding shares. Today it has 4.71 billion shares outstanding. This means that in the last decade, the number of XOM shares outstanding decreased by almost half. This means even if the company's value were to remain flat, each share's value would increase by 50%. If you divide a $400 billion company into 400 billion pieces, each piece is worth $1, but if you divide the same company into 200 billion pieces, each piece will be worth $2 instead. As a result, Exxon Mobil's EPS grew from $1.68 to $8.28, an increase of 393%. This is obviously much better than 250%.

Halliburton

Correlation: .304

What Could Move the Stock

Since Halliburton (NYSE: HAL) is an oil-field service company, it largely moves in tandem with the general energy sector.  Notably, Halliburton does well when new wells are being drilled, because it can then sell more drilling equipment and can consult and help to set up the wells. 

All Roads Lead Down

Into April I think that the market will hover around 1500 without displaying too much volatility.  However, oil could head lower.  And if a price correction for equities does come, then the ensuing “risk off” trade could depress oil prices even further. 

 


ChrisMarasco has no position in any stocks mentioned. The Motley Fool recommends Halliburton. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure