Are these the best oil stocks to watch?

Eight top oil stocks to watch

1. ExxonMobil
2. Royal Dutch Shell
3. Chevron
4. Total
5. BP
6. Ecopetrol SA
7. Renewable Energy Group Inc
8. Cheniere Energy Inc

ExxonMobil

ExxonMobil was founded in 1859 and has evolved from a kerosene producer in the US into a global behemoth that is now predominantly focused on upstream production. Producing oil and gas, as well as liquified natural gas (LNG), contributed 83% of net income in 2019 before central eliminations.

ExxonMobil has proven to be a reliable dividend payer in recent years, having grown at an average annual rate of 6.2% over the last 37 years, and it has pledged to maintain pay-outs during the coronavirus crisis.

While the company may have cut dividends in 2020, it has made a great recovery in 2021. As the chart below shows, ExxonMobil has been following a steady upward trend since the end of 2020. This recovery is due to an improvement on oil and natural gas prices as well as higher chemical margins. There has also been a recovery in the demand of the company’s products as global economies start to kick back into gear following the Covid-19 pandemic.

Royal Dutch Shell

Royal Dutch Shell (RDS) is the largest oil and gas company listed on the London Stock Exchange. Its origins trace back to importing from the Far East in 1833, but its venture into oil and gas began in the 1880s. Today, it has four main businesses including an upstream and a downstream division, which sit alongside its more distinguishing segments focused on integrated gas and alternative, cleaner energy.

The integrated gas division, which manages its LNG, fuels and other products, means RDS is more exposed to gas than other major producers. The business is onboard with the world’s ambition to move to cleaner forms of energy, but it believes gas is key in bridging the gap in the meantime. Still, it isn’t the company’s biggest driver, and efforts are very much focused on downstream operations, which accounted for the vast majority of revenue last year.

RDS offered a reliable dividend to investors, but pay-outs hadn’t grown for years and it utilised share buybacks to reward shareholders instead. But that came to an end in 2020 as the coronavirus crisis prompted it to cut its dividend for the first time since the Second World War and utilise the flexibility that buybacks offer.

Chevron

Chevron is another big US-listed oil and gas major. It began life as the Pacific Coast Oil Co when it was formed in 1879. Today, the company operates a more traditional model of upstream and downstream, which equally contributed toward earnings in 2019.

The company has consistently increased its dividend for 32 consecutive years and has committed to paying investors during the coronavirus crisis, marking a huge difference in attitude between US oil majors and their European counterparts. However, this is partly due to the fact they entered a troublesome 2020 with better debt to equity ratios than most of their international peers.

After a tough 2020, Chevron has pulled things back, posting reported earnings of $3.1 billion for the second quarter of 2021. This is a vast improvement over the $8.3 billion loss reported in quarter two (Q2) of 2020.

Like Exxon, Chevron suffered from downstream margin and volume effects from the pandemic, as well as the aftermath of a winter storm in the US that battered the south of the country in February. Its recovery has come thanks to higher oil prices on the back of economies rebuilding themselves after Covid-19.

Total

Total is a French giant that was born in 1924. Today, it operates in over 130 countries and it believes its geographical spread is a differentiator for the business. Currently, Europe, the Middle East and Africa are key hubs for the company, but it recognises areas like the Americas and Asia will play a bigger role in the future.

Total has pledged to become carbon neutral by 2050 and has been making large investments into renewable energy, such as a recent investment in a UK North Sea wind farm.

In 2019, Total’s downstream division generated nearly half of all revenues before eliminations, while its trading division contributed about one-fifth. Its upstream division only accounted for 16%, while its integrated gas and renewable energy unit contributed the rest. However, upstream contributed the most in earnings, followed by downstream.

In terms of its dividend, Total currently sits in between its European and US counterparts. It has maintained pay-outs during the crisis so far, but also committed to a more aggressive drive toward cleaner energy. It has, however, stopped buying back shares.

Total has shown significant growth recently, having a 59% increase in earnings before interest, tax, depreciation and amortisation (EBITDA). This is thanks to global economies recovering from their 2020 coronavirus-induced slump, as well as the fact that it’s diversified into renewable energy and away from hydrocarbon-centred activities.

BP

BP, the other major London-listed oil and gas behemoth, operates in nearly 80 countries worldwide and produces around 3.7 million barrels per day as of 2018.

Currently, it’s split into three key areas that operate in 87 countries worldwide: upstream, downstream and a third one representing its 19.75% stake in Russian giant Rosneft. Downstream was the biggest contributor to both revenue and earnings last year.

BP reported a decrease in energy consumption of 4.5% in 2020. This is the largest decline since 1945 and did affect the company.

However, as BP unveiled in 2020, they’re moving towards cleaner energy. They’ve shown this in 2021 by buying a string of solar farms to add to its clean energy transformation.

BP’s new chief executive Bernard Looney is still focused on their green strategy and is still to become net-zero by 2050 or sooner.

Ecopetrol SA

Ecopetrol SA is a Columbian oil company involved in multiple processes throughout the industry. It conducts exploration, production, refining and transportation in Columbia.

While the company is majority state-owned, it is also listed on the New York Stock Exchange. Founded in 1948, Ecopetrol SA has expanded into producing many petroleum related products including fuel, petrochemicals and fuel oil.

The business has shown a 12.6% increase in revenue, and the company is giving out a healthy dividend. This small, focused company can give traders and investors some access to the South American oil world.

Renewable Energy Group Inc

Renewable Energy is a Fortune 1000 corporation based in Iowa in the US. The company operates 13 biorefineries and a feedstock processing facility, and converts natural fats, oils, and greases into advanced biofuels.

Renewable Energy stock returned 156% to investors in the last year, and this can be partly attributed to the fact that it was one of the firms that benefitted from the nearly $700 million in coronavirus relief aid from the US government.

Cheniere Energy Inc

Cheniere Energy Inc is an energy company based in Texas, USA. While the company does not mine or produce petroleum, it holds tremendous value in the Liquified Natural Gas (LNG) sector. Natural gas is on the rise both financially and environmentally.

Cheniere is the largest LNG operator in the United States. Its facilities allow the LNGs to be loaded onto ships for transportation across the globe. The company is said to growing fast and is aiming to be the biggest facility by the middle of the decade.

Cheniere got off to a to a strong start in 2021 with earnings of $1.54 per share and generated revenue of $3.09 billion.

How to trade or invest in oil stocks

There are multiple way for you to get exposure to the oil markets. You can trade oil using spot (cash) prices, options or futures via spread bets or CFDs. Alternatively, you can invest in oil company shares or ETFs using our share dealing platform.

How to analyse oil stocks: what affects their price?

Below are some of the key considerations to take into account when evaluating the major oil and gas stocks:

• Production: the amount of oil and gas a company produces, which is often measured in barrels of oil equivalent
• Commodity prices: the price of oil and gas dictates what these companies can sell their product for, which goes toward deciding on the margin it makes on each barrel
• Costs: the other driver to margins is the cost of extracting the stuff out of the ground. Low costs are key, especially when prices are low, as this can be the deciding factor behind whether a company is profitable or not during a downturn
• Cash flow: oil and gas companies have a lot to pay for. They have to maintain their huge operations, invest in new projects and exploration, and keep shareholders happy by paying dividends. Generating cashflow is how they must pay for all of this if they are to avoid using debt
• Dividend and buybacks: many investors flock to oil and gas companies because they are known for generous pay-outs compared to many industries, while some also reward investors with additional share buybacks
• Resources and reserves: the amount of oil and gas they have in resources and reserves can play a large part in deciding the value of a company. This is the same as taking the value of excess stock of a retailer into account
• Exploration and prospects: resources and reserves are found by exploring new prospective areas for oil and gas. Exploration is risky and expensive, and often doesn’t pay off, but it is essential for the industry and a solid track record in delivering new projects is key

What you need to know about the oil industry

Oil and gas is key to powering the world economy. Oil is predominantly used to fuel road, sea and air travel, but is also used in a wide range of applications including the production of petrochemicals and plastics.

Gas is mostly used to generate electricity or heating for residential, commercial and industrial use, while also being used to create plastics and other chemicals.

Upstream production refers to the underground and underwater search for crude oil and raw natural gas, including the exploratory drilling and operating of these wells. Downstream production refers to the refining activities that turn those raw products into an array of other goods, such as petroleum, gasoline, diesel, kerosene or jet fuel. The closer the production process gets the raw product to its final form, the further downstream the process is said to be.

There are two main aspects to most of the big oil and gas players: upstream and downstream. Upstream concerns the extraction of oil and gas while downstream handles the refining activities that turn those raw products into an array of other goods, such as petroleum, gasoline, diesel, kerosene or jet fuel.

Brent crude oil vs WTI: what are the key differences?

Not all oil and gas is equal, and the characteristics and quality can vary depending on where and how it is produced. For example, most of the oil produced in the shale-rich regions of the US is known as West Texas Intermediate (WTI), whereas many other countries produce a slightly sweeter product known as Brent crude oil.

There are three big players in terms of geography in the industry. The first is the Organisation of Petroleum Exporting Countries (OPEC), a group of countries predominantly in the Middle East and Africa that is led by the largest producing nation in the world, Saudi Arabia. The second is Russia, which is one of the largest individual producers, and the third is the US, where the shale industry has taken off over the last ten years.

Brent crude oil is the international benchmark used by the OPEC. WTI is benchmark used by the US. Countries will use the benchmark of the oil that they predominantly import. For instance, India imports mostly from OPEC countries, and thus uses Brent crude oil.

Two-thirds of the world trades in Brent crude, which makes it more sensitive to geopolitical tensions. The cost of shipping Brent crude is lower because it is typically produced near the sea and can be put on shipping containers immediately, while WTI is produced in landlocked areas where storage facilities are limited.

Best oil stocks summed up

• With us, traders and investors have many opportunities in and around the energy markets
• Many oil companies, including BP, are moving away from fossil fuels and into clean energy
• While the world has gone through a rough time, the energy industry has continued to show above average performance in some of the hardest economic times. Investors and traders should take advantage of the market trends in the oil markets
• You can trade oil on the spot, via futures or options, or invest in oil company stocks and ETFs

Footnotes
¹ Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.