Oil Investment: Where To Put Your Money Now

Oil stocks have had a turbulent time in recent years, with the COVID-19 pandemic causing a sharp decline in 2020, followed by an outstanding year in 2022 and a dismal year in 2023. However, analysts predict a brighter outlook for 2024, with crude oil prices expected to remain elevated due to tight supply, increased geopolitical risk, and strengthening global demand. This sets the stage for potential profitability and stock price gains in the energy sector.

When considering which oil stocks to invest in, it is important to assess the company's financial health, scale, access to low-cost oil, and ability to generate cash flow. Additionally, investors should be mindful of the risks associated with the volatile nature of the oil industry, which is influenced by factors such as economic growth, geopolitics, and capital allocation. Diversification and a strong financial profile are key characteristics of oil companies that are better equipped to navigate downturns.

Some of the top oil stocks to consider for 2024 include ConocoPhillips, Devon Energy, Enbridge, ExxonMobil, and Phillips 66. These companies stand out for their strong operations, consistent performance, and ability to generate cash flow. It is also worth considering exchange-traded funds (ETFs) and mutual funds that provide exposure to oil and energy stocks, offering the benefit of diversification within the sector.

Oil stocks

However, investing in oil stocks can be risky due to the cyclical and volatile nature of the industry. Oil demand generally tracks economic growth, but it is also heavily influenced by geopolitics and capital allocation. For example, the Russian invasion of Ukraine in 2022 caused oil prices to soar.

When investing in oil stocks, it is important to look for companies that can survive the industry's downturns. This includes companies with strong financial profiles, low costs of operations, and diversification in their business or geographical location.

Targa Resources (TRGP)

TRGP is a US midstream logistics company specialising in onshore natural gas and natural gas liquids. It has a high correlation to West Texas Intermediate (WTI) crude oil prices and is expected to benefit from the overbuild of Permian Basin natural gas liquids piping. The stock closed at $111.78 on April 18, 2024, with a price target of $126.

Schlumberger Ltd (SLB)

Schlumberger is one of the world's leading oilfield services companies, with high exposure to international and offshore oil production. The company has a strong combination of pricing power, operating leverage, and capital expenditure discipline, allowing it to generate solid free cash flows. SLB stock closed at $50.94 on April 18, 2024, with a price target of $62.

Halliburton Co (HAL)

Halliburton is a leading US oilfield services company with a resilient North American business and impressive international revenue growth. The company is attractively valued and is expected to return a significant portion of its free cash flow to shareholders in the coming years. HAL stock closed at $38.65 on April 18, 2024, with a price target of $43.

Baker Hughes Co (BKR)

Baker Hughes is a US oilfield services company providing equipment and technology for the energy sector. It is known for its leadership in liquefied natural gas (LNG) liquefaction. While the stock has underperformed year-to-date, it has multiple growth pathways outside of LNG. BKR stock closed at $32.20 on April 18, 2024, with a price target of $37.50.

Freeport-McMoRan Inc (FCX)

Freeport-McMoRan is the world's largest publicly traded copper producer and a major producer of gold and molybdenum. Tight copper supply and steady demand are expected to support copper prices, benefiting FCX. The company also benefits from record gold prices, which make up about 15% of its total revenue. FCX stock closed at $50.16 on April 18, 2024, with a price target of $59.

Other Options

Other options for investing in oil include oil mutual funds, oil futures, and oil exchange-traded funds (ETFs). Oil mutual funds and ETFs can provide diversification and are generally considered safer than investing in individual oil stocks. Oil futures are more advanced and carry more risk, as they involve locking in a price for oil in advance, which can be profitable or unprofitable depending on price movements.

Oil mutual funds

Oil is a vital energy product across a vast number of industries worldwide, and while alternatives are beginning to gain traction, the demand for oil remains high. The oil industry provides investors with an opportunity to participate in a growth-oriented equity market that boasts exponential profit margins for the long term. However, it is a highly volatile market, and investing in the oil industry comes with a great deal of risk.

One way to invest in oil is through mutual funds. Oil mutual funds are tasked with investing exclusively in the energy sector by investing a majority of their portfolios in companies related to energy. Here is a closer look at some of the top oil mutual funds:

Vanguard Energy Fund Investor Shares (VGENX)

The Vanguard Energy Fund was established in 1984 and manages $4.8 billion in investor assets as of June 30, 2021. The fund seeks to provide long-term capital appreciation by investing a minimum of 80% of fund assets in the common stock of companies primarily engaged in activities related to the energy industry. Integrated Oil & Gas, combined with Oil & Gas Exploration & Production, make up 43.4% of the fund's holdings. The 10-year annualized return for VGENX is -2.69% as of June 30, 2021, and the fund managers are able to sustain a relatively low expense ratio of 0.37%. A minimum initial investment of $3,000 is required.

Fidelity Select Energy Portfolio (FSENX)

The Fidelity Select Energy Portfolio is supported and managed by Fidelity Investments and was first made available to investors in 1981. FSENX invests a minimum of 80% of fund assets in securities of companies engaged in energy field activities, including oil, gas, electricity, coal, and new sources of energy. This non-diversified fund utilizes fundamental analysis to determine how investable each company's security is, based on financial condition and industry position. As of June 30, 2021, FSENX manages $1.3 billion in assets. FSENX has generated a 10-year annualized return of -2.08%, with an expense ratio of 0.85%. Shares of the mutual fund are available with no load and no deferred sales charges, and there is no minimum investment. Top holdings within FSENX include Chevron, Exxon Mobil, ConocoPhillips, and Royal Dutch, among others.

BlackRock Natural Resources Trust Fund (MDGRX)

The BlackRock Natural Resources Trust Fund was established in 1994 and seeks to provide investors with long-term capital growth by investing the majority of its assets in securities of companies with substantial natural resource assets. As of July 19, 2021, the fund manages $165.1 million in assets. As of June 30, 2021, MDGRX has generated a 10-year annualized return of 0.82%, with an expense ratio of 1.26%. Investors must pay an upfront sales load of 5.25% with any new purchase of shares. A minimum investment of $1,000 is required for both qualified and non-qualified accounts. Top holdings include Chevron Corp, TotalEnergies, Vale SA, and Royal Dutch, among others.

Integrity Mid-North American Resources Fund (ICPAX)

The Integrity Mid-North American Resources Fund is offered to investors through the Integrity family of mutual funds and has an inception date of 1999. Fund managers seek to provide investors with long-term capital appreciation by investing the majority of fund assets in the stock of domestic and foreign issuers participating or benefiting in the development of the resources located in the Williston Basin area. As of July 2021, the fund manages $119.6 million in assets. ICPAX has generated a 10-year annualized return of -2.23% with an expense ratio of 1.50%. Investors pay a 5% upfront sales charge on all new investments, and a minimum of $1,000 is necessary to purchase shares. Top holdings within ICPAX include Cabot Oil and Gas, Phillips 66, Pioneer Natural Resources, and Archrock Inc.

Oil futures

When trading oil futures, it is important to consider the margin requirements and pass a broker's suitability review. Some brokerages may also require a minimum account value for authorisation. Fees and commissions can vary depending on the brokerage.

Oil ETFs

Commodity ETFs invest in oil futures contracts and attempt to mirror the performance of the underlying commodity index. However, because oil futures are often in contango, commodity ETFs may incur costs when they roll expiring futures contracts into the next month, leading to potential tracking errors.

Examples of Oil ETFs

• United States Brent Oil Fund LP (BNO): This ETF mirrors the daily percentage change in the spot price of Brent Crude oil, the primary benchmark for European oil. It primarily invests in Brent Crude futures but may also invest in forwards and swap contracts. BNO has delivered the best 1-year return among oil ETFs.
• United States Oil Fund LP (USO): Structured as a commodity pool, USO aims to mirror the percentage change in the spot price of WTI, the benchmark for US oil. In addition to oil-related contracts, it may also invest in forwards and swap contracts. USO is the most liquid oil ETF and has the lowest fees.
• United States 12 Month Oil Fund LP
• ProShares K-1 Free Crude Oil Strategy ETF
• MicroSectors Oil & Gas Exp. & Prod. 3x Leveraged ETN
• VanEck Vectors Oil Refiners ETF (CRAK): This ETF focuses solely on US and overseas crude refiners.

Risks and Considerations

While oil ETFs offer a more straightforward way to invest in oil compared to oil futures, they still carry risks. Oil is a highly volatile commodity, and its price can be influenced by various factors, including supply and demand disruptions, geopolitical events, and the actions of oil-exporting nations like those in OPEC.

Additionally, commodity ETFs are subject to tracking errors, and their performance may not always match the underlying oil index or crude oil prices. Oil equity ETFs, on the other hand, carry the risks associated with investing in individual oil companies, which can be affected by operational, financial, and environmental factors.

Final Thoughts

Oil companies

When it comes to investing in oil companies, there are a few options to consider. One option is to invest in oil stocks, which are shares of companies involved in the extraction and production of petroleum. Another option is to invest in oil funds, such as exchange-traded funds (ETFs) and index funds, which can provide diversification and reduce risk. It is generally recommended that the majority of an investment portfolio be comprised of mutual or index funds rather than individual stocks. Additionally, investing in oil futures is a more advanced option that involves buying or selling contracts for a set amount of oil at a set price on a set date. This can be risky, as seen during the COVID-19 pandemic when oil refineries reduced their purchases and investors struggled to find buyers for their contracts.

• Diamondback Energy (FANG): One of the best-performing independent oil and gas companies, extracting onshore oil and natural gas reserves, mostly in the Permian Basin.
• Coterra Energy (CTRA): An independent oil and gas company producing oil and natural gas in the Marcellus Shale area and the Anadarko Basin with strong operations and consistency.
• ConocoPhillips (COP): One of the largest exploration and production companies in the world, benefiting from scale and access to low-cost oil, with operations in over a dozen countries.
• Devon Energy: A U.S.-focused exploration and production company with diversified operations across several low-cost, oil-rich basins, allowing for the generation of substantial cash flow.
• Enbridge (ENB): Operates one of the largest oil pipeline systems in the world, transporting 30% of the oil produced in North America, along with natural gas pipelines, a utility business, and renewable energy operations.
• ExxonMobil (XOM): One of the largest oil companies globally, operating in every segment of the oil and gas industry, including exploration and production, midstream, petrochemical manufacturing, and refining.
• Phillips 66: One of the leading oil refining companies with operations in the U.S. and Europe, as well as investments in midstream operations and petrochemicals.
• Targa Resources (TRGP): A U.S. midstream logistics company specialising in onshore natural gas and natural gas liquids, with a high correlation to WTI crude oil prices.
• Schlumberger Ltd. (SLB): One of the world's leading oilfield services companies, with high exposure to international and offshore oil production and solid free cash flows.
• Halliburton Co. (HAL): A leading U.S. oilfield services company with resilient North American operations and impressive international revenue growth.
• Baker Hughes Co. (BKR): A U.S. oilfield services company providing equipment and technology for the energy sector, known for its leadership in liquefied natural gas liquefaction.
• Freeport-McMoRan Inc. (FCX): The world's largest publicly traded copper producer, which is also a major producer of gold and molybdenum, benefiting from tight copper supply and steady demand.

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