Expected Return on Oil Stocks 2021

5 Best Oil Stocks for a 2021 Gusher

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How to find the best oil stocks to buy in 2021

Oil stocks and the energy sector have crashed this year with the group plunging almost 34% so far this year, underperforming the market by 48% and the hot tech sector by nearly 72%!

In this video, I’ll show you why energy could be the breakaway sector of the market. I’ll share the research why energy stocks could bounce, why electric vehicles will not be the death in oil demand and then reveal five stocks I’m watching for 2021.

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Why Oil Stocks are Surging into 2021

Nation, I know a lot of you are hesitant to invest in oil stocks but you CANNOT ignore this sector in 2021! We’re two months into our portfolio on Stockcard and the two energy stocks are the highest returns; we’re up 51% in Diamondback Energy, ticker FANG, and closed our position in Devon Energy, ticker DVN for a 54% gain!

Oil stocks got crushed earlier this year when the price of crude went negative and these companies went into survival mode. Stocks in the sector are the worst performing this year. A chart by Sector SPDR funds, shows the year-to-date returns for each of the 11 stock sectors and the S&P 500 index with energy one of only four sectors to report a loss.

But that blood in the streets selloff could mean these stocks have even further to rebound, even after the sector jumped 37% in the last month, more than seven-times the market return!

The price of crude has jumped in the last month and is up more than 13% since the end of the third quarter. Yes, these stocks have already run that 37% in the past month but there’s a good chance we could see outperformance for at least another year.

What I want to do in this video is show you the analyst research behind oil stocks, how high these could go. Then I’ll explain why you don’t need to be worried about electric vehicles destroying oil demand and then reveal those five oil stocks to buy for next year.

In fact, I bought one of these for our 2021 Bow Tie Nation portfolio on Stockcard. Just two month’s into the portfolio and we’re up 30%…beating the market by 25% over the period. It’s free to follow the portfolio and you’ll get notifications whenever I buy or sell from the list, even before these videos come out.

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Expected Returns for Oil Stocks 2021

With the rebound in the price of crude, analysts expect the energy sector to post the highest return in the market over the next twelve months, pretty much dwarfing everything else. These are sector-level expected returns, so of the analysts polled by FactSet Research, they took the difference in the average target price and current closing price for all the stocks in each sector for a return estimate.

Analysts expect stocks in the energy sector to post a 46% return from November, so even after the run last month, that’s still another 15% or so upside. That would still put it on par with expectations for healthcare stocks and those in the financials, the next two sectors here.

Expected Return on Oil Stocks 2021
Expected Return on Oil Stocks 2021

Oil Supply and Demand 2021

And it’s really all about oil supply and that overreaction to this years plunge in prices. This chart from the U.S. Energy Information Administration shows world production of fuels in the brown line and then consumption in blue.

Will Oil Stocks Recover in 2021?
Will Oil Stocks Recover in 2021?

And you see the drop in demand from about 100 million barrels a day down to about 90 million…but look at the reaction in supply. Oil production dropped from just keeping up with demand to 85 million barrels a day, a deficit of five million barrels a day even during the worst of the lockdowns.

And while this graph shows production rebounding quickly, I think its overestimating the speed at which drillers can come back online.

The EIA estimates total global production to rebound to 97.4 million barrels of oil a day next year, just under the estimate for 98.2 million barrels in daily consumption.

The problem is, drillers and everyone in the space have severely cut their investment spending this year. For example, Chevron announced last week that it would cut its capital spending by 26% over the next year, shaving $5 billion off spending to find and develop oil fields.

First, that’s going to result in lower production that expected and I don’t think the market is ready for it. These kind of investment cuts are happening with every oil company, slashing the amount they spend to find and produce crude.

Second, if we get any kind of an economic recovery, and right now the market is pricing in growth of at least four percent, especially if airline travel rebounds…that could drive oil demand well over the 101 million barrels a day used in 2019.

So if you just do some quick back of the envelope math, if oil supply comes in at 96 million barrels a day and demand surprises on the upside to maybe 101 million barrels…that’s a deficit of 5 million barrels of oil a day on the market…a deficit that could take the price of crude back up to fifty- and sixty-dollars a barrel real fast!

Why EV Will NOT Kill Oil Companies

Now I know what you’re saying…but Elon Musk is going to kill fossil fuels! Everyone is going to be driving electric cars soon and big oil is dead!

Hold up there sport. Maybe a little perspective will help bring some reality back to the discussion.

Global EV sales were 2.1 million last year for about 2.6% of the total vehicle market. Market researcher Frost & Sullivan expects the market to grow to 6.9 million sales by 2025, which granted that would be a very strong 27% annualized pace, but would still be just 8.6% of the total car market.

Think about it this way. Online sales as a percentage of total retail hit 2.1%, so the same market share electric vehicles have this year, in 2004. For further reference, the market share for online sales hit 8.6% in 2016…12 years later.

Was the shift to online a worry for retailers in 2004, yeah kinda…but nobody was talking about the death of brick and mortar stores. Even when the share for online sales hit nine- and ten-percent, traditional retailers were just starting to feel the pinch.

My point is, yes the rise of electric vehicles is an annoyance to oil companies…but at just 2.6% of the market, it’s more of a fly at this point. And even on that 27% annual increase in EV sales, it’s not going to save us if we have a five million barrels a day oil deficit. Oil prices will go up and so will the shares of oil companies.

5 Best Oil Stocks to Buy Now

So maybe these five oil stocks aren’t something you hold for 20 years because maybe someday…some far away time when cars run on dreams and everything is rainbows and unicorns, someday maybe we break our 161-year dependence on crude oil…but until then, and at least over the next five years, oil stocks will have a clear runway higher.

Our first oil stock pick for 2021 is one I’ve held for quite a while, $176 billion oil major Chevron, ticker CVX, and its 5.5% dividend yield.

While Chevron has a lot of those retail gas and LNG assets, so revenues outside the production segment, it’s still very much a driller. And this is really where the company excels as a low-cost crude producer. Research here by Morningstar shows the 2020 and 2021 break-even prices for the major oil producers, that’s the blue and red dots in the graph.

And what you see is Chevron has one of the lowest break-even prices in the industry. The company is profitable with oil around $50 a barrel and that gives it a lot of flexibility in field development and spending.

The company has a strong history of dividend payouts with a 6% increase in the last year which is pretty amazing considering how bad it’s been for the industry.

Earnings are expected to rebound to $2.75 per share next year, from a 2020 loss, and then to $4.84 in 2022. The average analyst target is for $98 a share over the next year which is only 7% higher but on top of that healthy dividend and this one I think keeps running for years to come.

EOG Resources, ticker EOG, is in the top five for analyst return expectations with a price target of $64 a share and a 2.8% dividend yield.

I highlighted EOG a month ago in a video on stocks for upside on Q3 earnings surprises. The company ended up beating earnings expectations by 126% with the shares jumping 38% since then.

That average analyst target still leaves 23% upside to the shares though and the company is one of the best run in the industry. It’s drilling in over 10,000 sites with enough reserves for more than a decade so it can afford to cut spending and still produce at a fairly high level. That’s what has boosted profitability and helped it double earnings expectations.

Kinder Morgan, ticker KMI, is a midstream company which means it owns the pipelines and storage and pays a very strong 7.1% dividend yield.

The company owns more than 80,000 miles of oil and gas pipeline across the U.S. and draws constant fees from oil companies to use the assets. This is another one I’ve been following lately because of massive insider buying. Co-founder and Chairman Rich Kinder alone has added over 1.5 million shares this year, boosting his ownership of the company to 11% worth $3.7 billion.

These are some great cash flow assets, collecting a fee from producers for moving oil and gas through the pipelines. Even after slowing the dividend growth this year, the payout has still doubled since 2017.

Distributable cash flow is expected at $5.1 billion this year, so plenty of cash survivability and the potential to take advantage of lower prices in that oil & gas space. Besides that solid dividend, the average analyst target for the shares is at $17.60 each, a return of more than 19% above the current price.

We’re adding a renewables pick to the list here with Renewable Energy Group, ticker REGI, a leader in the bio-fuels space.

The company operates 12 bio-diesal refineries globally, producing nearly 500 million gallons and $2.6 billion in sales. Renewable Energy booked a 30% annual growth in sales over the decade through 2019 and this fuel is going to be a key driver for companies needing to cut carbon emissions over the next decade.

I like using the management effectiveness Stockcard here to see how the company stacks up in return on assets and return on invested capital. The company’s ROIC of 49% is 10-times the sector average and management has been able to produce a 40% return on assets over the last year which is pretty much unheard of in any sector.

This one doesn’t pay a dividend yet but I think it’s on the horizon and the average analyst target of $72.60 per share is 22% higher than the current price.

In fact, I think this one pushes higher than that price target and I added it to our 2021 Bow Tie Nation portfolio. I like all five of these stocks on potential upside but this one combines that renewables theme and great management for the win!

Phillips 66, ticker PSX, is another high-dividend pick and some great diversification for a large producer.

I like Phillips because it’s got a more diversified revenue stream than you see in most large oil companies. Besides the familiar retail gas stations, the company has refineries, midstream pipelines and a chemicals business that really sets it apart.

I love the diversification here and it’s got a strong balance sheet with enough cash flow to keep up the dividend increases.

The average analyst target for shares is only 7% higher from here but on top of a 5.4% dividend yield makes for a double-digit return and upside in the future.

Sign up on Stockcard for free and make stock-picking easy with the research tool I use! Use promo code: bowtienation for an exclusive discount!

Oil stocks are rebounding into 2021 and they could be your best investment for high returns and dividends. Don't overlook the sector and don't worry that EV is going to kill oil demand.

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