The oil companies that most traders are familiar with are often referred to as “upstream” oil stocks, meaning they handle exploration and production (E&P) of oil and natural gas, as well as oilfield services.
With oil prices in the news recently due to increasing worries posed by the Omicron variant of the covid virus, we’ve decided to take a closer look to give our traders a flavour of the different upstream stocks you can invest in, and drill a little deeper into three of the largest companies, ExxonMobil (XOM), ConocoPhillips (COP) and Schlumberger (SLB).
ExxonMobil is one of the largest oil companies in the world, and the 24th largest company in the US at the time of writing. The company operates in every sector of the oil and gas industry, including exploration and production, refining, storage, transportation, delivery and marketing petroleum products to customers.
The past decade hasn’t been the greatest ten years in its history. Profits have steadily declined during that period, and after more than a century in the Dow Jones Industrial Average, it was removed from the index in August 2020. In May 2021, the company reluctantly gave up three seats on its board to climate-focused hedge fund Engine No.1 after pressure by environmental campaigners.
But recently, the company’s efforts to slash business costs and boost efficiency are beginning to show promise. It has refocused its efforts and resources on its highest-returning assets, leading to significantly lower oil production costs.
As a result of operational improvements, and the recent recovery in oil prices and global demand due to the pandemic recovery (Omicron notwithstanding), its cash flows are surging and the company is in relatively rude health. Part of what props up Exxon’s stock price is that, even at the worst of times, it’s been a reliable dividend returner for shareholders. Its current performance should continue to protect its status as a dividend diva.
With concerns over the environment and the long-term viability of companies like Exxon, some shrewd investors are hoping that the share price could remain undervalued for an extended stretch, offering many good buy opportunities over the next several years.
For traders seeking to take advantage of the rising (and sometimes dipping) oil prices and steady demand, ConocoPhillips is an important stock to watch. One of the largest exploration and production companies in the world, COP specialises in finding and manufacturing oil and natural gas in more than ten countries.
Its major advantage in the market is that, partly due to its size and scale, it has access to some of the lowest production costs in the world. Its acquisition of Concho Resources in 2020 gave it significant exposure to the Permian Basin in the southwest United States, where at least 20 billion barrels of oil are expected to remain.
With a low average cost of production of around $40 per barrel and many of its production costs even cheaper, the company is well-positioned to turn a profit in almost any oil environment. The company has pledged that as long as Brent Crude prices average around $50 per barrel over the next decade, it will return its entire market cap in dividends and share repurchases.
Finally, the company boasts a top-tier balance sheet to complement its low-cost production portfolio. ConocoPhillips regularly boasts one of the highest credit ratings of all exploration and production companies, backed by high cash flow and a low level of leveraged debt.
This all adds to a company that’s been able to generate consistently impressive numbers while raising shareholder dividends six times in as many years. That could lead to investors being bullish on COP in the long run, which is something CFD traders should keep a close eye on.
Schlumberger is in many ways the “other side” of the oil and gas segment. It’s the largest oil-field services company in the world, offering exploration and production companies such as Exxon and ConocoPhillips a complete suite of services to help them find, drill, and produce petroleum and gas products. The company produces and shares a broad range of products and equipment that facilitates the entire process, with a particular focus on offshore operations such as ocean-based oil rigs.
It operates a broad spectrum of industry segments, including:
Reservoir characterisation – which helps exploration companies understand the rocks and fluids they’re dealing with when they come across new oil reservoirs.
Drilling services – for which it produces equipment and tools to make the drilling and development possible.
Production services – which provides an entirely different set of tools that helps producers keep a reservoir open and extend its shelf life.
Cameron – a subsidiary that manufactures auxiliary tools such as rig equipment, drilling tools and climate control systems.
Because of its diversification across so many segments of the energy industry, Schlumberger isn’t as sensitive to market downturns as smaller, more singularly-focused peers. During the height of the pandemic, when oil prices turned negative, Schlumberger suffered, but still significantly outperformed its competitors, since its portfolio of products and services held up much better.
This ability to continue performing well despite deteriorating market conditions enabled the company to buy Cameron, which improved its ability to turn more profit during the next upturn. While its peers may only perform well during boom cycles, Schlumberger’s key to its success is its diversity, allowing it to position itself in downturns to thrive even better when conditions improve.
You can trade these three energy giants, as well as hundreds of other stocks and assets like forex and crypto, with a secure, reliable and regulated broker. TIOmarkets offers some of the best conditions to traders on either side of the market, meaning you can buy or sell any asset in our offering. Open an account today to see why we’re one of the fastest-growing brokers in the world.
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