Low oil prices are hurting oil production companies, many of which are spending more to pump oil than they are getting for it. They're also likely to hurt alternative fuel companies, which are less attractive when gasoline is cheap. So, when oil prices are this low, does anyone win?
We asked four Motley Fool energy industry contributors if there were any stocks in the sector that would actually benefit from the current situation. They came back with Frontline (NYSE:FRO), Brookfield Asset Management (NYSE:BAM), Phillips 66 (NYSE:PSX), and Casey's General Stores (NASDAQ:CASY).
Here's why they expect these stocks to benefit from oil prices at these levels.
A windfall from low oil prices
Travis Hoium (Frontline): Cratering oil prices are creating conditions for a huge windfall flowing to oil tanker companies like Frontline. The company simply owns tanker vessels and rises or falls based on the rate the market commands to rent those vessels, and right now they're in high demand.
The reason tankers are in demand is because traders and oil producers are trying to find ways to store oil and they're running out of options. A trader could buy a barrel of oil for $10.93 with a June 2020 futures contract and then sell oil for $21.46 per barrel in August 2020, locking nearly a 100% gain in two months! The only problem is, that trader would have to find a place to store that oil for two months. That's where tankers come in.
Reuters recently reported that 160 million barrels of oil are just sitting in tankers being stored for future sale at "hopefully" higher prices. That caused the dayrates for very large crude-oil carriers to double in a week in late March to $180,000 per day. I wouldn't be surprised if prices have gone up from there. Short term, this will create a huge windfall for tanker companies.
The problem is that long term, the current glut in oil could create problems for tankers. If demand for oil falls permanently, there will be less need for tankers and the industry will be oversupplied. Long term, oil tankers aren't stocks I would buy, but that doesn't mean they aren't benefiting from low oil prices right now.
Ready to act
Jason Hall (Brookfield Asset Management): One of the best ways to profit in the oil and gas business is to always have money when others don't. Brookfield Asset Management manages many billions of dollars in real estate, infrastructure, and industrial assets for institutional clients, high-wealth individuals, and sovereign wealth funds. It also manages several publicly traded partnerships that invest in and operate these sorts of assets.
Brookfield has made it a point to always have liquidity ready so it can take advantage of unexpected opportunities, and right now, in this unprecedented environment, there will likely be plenty of chances to deploy cash in high-quality assets at fire-sale prices.
And while it's probably not a fire-sale opportunity, Brookfield is reportedly leading a group of investors looking to invest $8 billion in a massive natural gas pipeline owned by the Abu Dhabi National Oil Company in the the United Arab Emirates. According to reports, the Brookfield-led group is that last bidder standing for the pipeline, a likely outcome of the collapse in oil prices having pushed other bidders out of the running.
Whether this deal comes to completion or not, it's an excellent reminder that being well-capitalized in the current environment is a very real competitive advantage. Look for Brookfield to be an active participant in the oil and gas market over the next year as assets go on the block at liquidation prices.
The best-positioned refiner for low oil prices
Matt DiLallo (Phillips 66): It's hard to find an energy company that's immune to the impact of low oil prices, because there's such an overabundance of supply that the industry is running out of room to store all the excess crude oil and refined products. However, one company that should benefit from lower oil prices once the sector works through its current storage issues is refining and logistics giant Phillips 66.
Analysts believe it might be the only refiner to turn a profit this year thanks to the strength of its midstream and marketing operations. Bank of America, for example, believes these two businesses will contribute $2.8 billion in cash flow this year thanks to their relative insulation from commodity price risk. The company's midstream business will see some benefit from the storage constraints because it's building new capacity that will come online this year.
Meanwhile, Citi believes that Phillips 66 should see the "steepest earnings recovery ramp in 2021" as its refining business starts thriving on lower oil prices and an anticipated rebound in refined product demand. The company has invested heavily in recent years to increase its ability to process oil produced in North America, which currently trades at a significant discount to crude produced elsewhere. That should prove to be a competitive advantage as it refines more of this low-cost oil. That upside, when combined with the fact that shares of Phillips 66 are down about 40% this year, makes it looks quite attractive.
Low-priced fuel and pizza, too
John Bromels (Casey's General Stores): Despite the name, Casey's is actually a gas station chain. Like other gas stations, it has been hit hard by coronavirus-related travel restrictions. However, because it doesn't have refinery operations like many other gas station brands (including Phillips 66 and ExxonMobil), it won't see a negative impact on oil prices. In fact, it may actually see a benefit.
Casey's locations are largely centered in rural areas of the upper Midwest, especially Iowa, Illinois, and Missouri. That means there's often a limited amount of competition from other filling stations. Casey's has started using price optimization software to adjust fuel prices to maximize income. With oil prices low, of course, gas prices are also down, so Casey's locations may have more room to increase their margins on gasoline sales. As states begin to ease stay-at-home restrictions -- some of which may be lifted in rural areas first -- Casey's is likely to see more traffic.
Like many other gas stations, though, while the bulk of Casey's revenue may come from gasoline, its primary profit drivers are convenience store sales, including made-to-order pizza and sandwiches. Again, because Casey's operates in rural areas, it may be the most convenient carry-out restaurant for many customers. In response to the coronavirus, Casey's has extended DoorDash pizza delivery to an additional 579 of its 2,200 locations, expanding its reach even to customers who aren't driving.
The market clearly likes Casey's prospects, too: Shares are only down about 2% year to date, so it's not exactly a bargain within the industry. But it's one of the few energy industry stocks that may benefit from low oil prices.