Oil prices reversed their recent dive on Thursday, with West Texas Intermediate crude futures up 24% on word that the Trump Administration could take actions intended to force Russia and Saudi Arabia to back down from their plans to flood global oil markets.
As a result today, shares of oil and gas midstream and logistics companies Enterprise Products Partners LP (NYSE:EPD), Holly Energy Partners LP (NYSE:HEP), and Sunoco LP (NYSE:SUN) surged 18.3%, 47%, and 26%, respectively.
It's been a tough couple of weeks in the oil patch, and companies that play a role in getting crude and refined products to market are facing big reductions in demand as the COVID-19 pandemic shuts down travel and industrial activity around the world. A recession is all but certain at this point, and global oil demand is expected to fall sharply as a result.
Things are even worse as OPEC and Russia fight a war over global oil supremacy that has sent crude prices down more than half since January and below $30 per barrel. U.S. oil companies are caught in the middle, getting squeezed by the combination of falling prices and demand. Sunoco is particularly affected by weakening demand, since it is one of the largest distributors of refined fuels, supplying 10,000 refueling stations in more than 30 states.
For Holly Energy Partners and Enterprise Products, the implications are more about the flow of oil and refined products through pipelines and gathering systems. Much of their cash flows are guaranteed under long-term contracts with oil and gas producers, but the calculus of the "security" of those cash flows has changed enormously with oil prices down so much. Simply put, those contracts may not be worth much if the oil producers are insolvent.
Today's reprieve from a weeks-long sell-off is a reaction to hope that the White House will indeed take actions to force Russia and Saudi Arabia to bring their crude war to, if not an end, at least reduced escalations.
Looking out a year or more into the future, things will undoubtedly look better in the oil patch, but I would caution investors from going too big, too quickly, into this market. It's nice that the U.S. government is considering throwing its weight behind efforts to stabilize oil prices, but until and unless that actually happens (and we see it make an impact), I wouldn't count on it as part of any thesis that oil prices will rebound.
Besides, the bigger threat right now is a recession that will cause oil consumption to crater, with or without price relief. With that reality in mind, if there's one of these three stocks that deserves a close look right now, it's Enterprise Products Partners. It has an incredible track record of results, a balance sheet that gives it tons of flexibility, and a management team with a record of navigating the oil market's crazy cycles.
That's no guarantee you won't see the price fall further in the coming months (chances are we'll see more oil flood the market and crude prices fall more), but the huge crash we have already seen should pay off with huge returns in the coming years.