The U.S. oil market of 2020 has been like few other times in history. The Covid-19 lockdown caused demand for oil to sink rapidly as demand for oil evaporated. Even if the global economy recovers now, it would take months for the unused oil locked up in storage to be fully used before production is pumped up again. So, is buying oil stocks now prudent?
The Struggle for Big Oil Companies
As the return on assets graph below shows, even the “Big Oil” companies have struggled
Bearish Move for an ETF
The United States Oil ($USO) ETF has direct exposure to US oil prices, and its shares have fallen nearly 83% YTD. It was hurt with the negative turn of oil prices on April 20.
Are there oil companies that can weather the storm?
Analysts have detected some strong companies worth checking out. These companies are strong financially,, operate in a diversified manner and can therefore overcome the carnage. Among these are a mega-producer ConocoPhillips ($COP); refining, petrochemicals and pipelines giant Phillips 66 ($PSX); and even the aforementioned Big Oil companies such as Chevron ($CVX), ExxonMobil ($XOM), Royal Dutch Shell ($RDS.A, $RDS.B) and BP ($B). Analysts believe that these stocks have the financial strength for overcoming any downturn.
ConocoPhillips is one stock that analysts believe stands apart because it has prepared for a downturn by selling high-cost assets. That cash has enabled it to strengthen its balance sheet. This year, it entered with cash worth $8.4 billion. Its leverage ratio was also second lowest in the sector. It has also managed to slash cash outflows to adjust to the lower oil prices. Flexibility and financial strength are in its favor right now.
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