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Energy Stocks Lead Markets Higher as Oil Tops $40

By Dan Caplinger – Jun 19, 2020 at 12:35PM

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The stock market posted modest gains as investors look at the prospects for a return to more-normal economic conditions.

Friday morning brought another relatively calm session to Wall Street, as major market benchmarks were generally higher but by modest amounts. Market participants are trying to be patient in seeing whether the recovery from the worst of the coronavirus pandemic will continue or whether a new wave of COVID-19 cases will force people to reassess the trajectory of the disease. Just after 11 a.m. EDT today, the Dow Jones Industrial Average (^DJI 2.66%) was up 146 points to 26,226. The S&P 500 (^GSPC 2.59%) gained 19 points to 3,135, and the Nasdaq Composite (^IXIC) picked up 88 points to 10,031.

Among sectors of the market, energy stocks did the best, with gains between 1% and 2% for sector ETFs focusing on the industry. Some of that rise came from favorable moves in the crude oil market, but a few individual stock names also made news that gave shareholders something to cheer.

Another move higher for oil

Crude oil prices have been extremely volatile in recent months, as coronavirus-inspired business closures sent demand for energy products tumbling. Now, businesses are starting to reopen, and that's helped to bring supply and demand into a better balance. Moreover, efforts from OPEC nations and Russia to curtail productions levels have prevented more gluts of crude on the global market.

One interesting shift has happened in the oil market. Investors are now paying more for spot oil and near-term oil futures contracts than they are for crude for delivery further into the future. That's a dramatic reversal from the state of the crude market just a couple of months ago, when investors were briefly willing to pay to have others take crude oil off their hands.

Speedway gas station, with several pumps and cars in the parking lot and a scenic desert mesa background.

Image source: Marathon Petroleum.

Take 2 for Marathon Petroleum sale?

Among individual energy companies leading the sector higher, shares of Marathon Petroleum (MPC 3.48%) rose 6%. The downstream refining and marketing specialist has gone on a roller coaster ride in recent months, but news today suggested that a strategic move that many thought was no longer an option could now be back on the table.

Marathon is the company behind the Speedway chain of gas stations, and it's been looking to sell Speedway for some time now. Activist investors in Marathon have highly supported doing something with the gas station chain to unlock shareholder value. But attempts either to spin off the unit as a separately traded company or to sell to Japanese 7-Eleven parent company Seven & i Holdings didn't lead to a favorable resolution, especially with the coronavirus pandemic complicating matters for the would-be buyer.

Now, though, Marathon is back in discussions with potential bidders to sell Speedway. Reports suggest that the purchase price might be closer to $18 billion, down from the $20 billion that it had hoped to get from Seven & i earlier this year.

Investors are excited about a possible deal, because the cash infusion would go a long way toward helping Marathon pay down its extensive debt. Yet even if it can't find a buyer for Speedway, Marathon is still looking to pursue a possible spinoff in early 2021, as long as market conditions support such a move.

Occidental gets an upgrade

Elsewhere, Occidental Petroleum (OXY 4.25%) saw its stock rise 4%. Favorable comments from stock analysts supported the idea that Occidental could improve its financial condition by considering significant sales of assets.

Analysts at SunTrust boosted their rating on the oil stock from hold to buy, nearly doubling their price target from $13 to $25 per share. Some of those following the stock have worried about the massive amounts of debt that Occidental took on to acquire Anadarko Petroleum, but SunTrust believes that it could go a long way toward controlling that debt by looking at selling off both U.S. and international energy plays to raise cash. Even with oil prices at relatively low levels, though, Occidental should be cash flow positive both this year and next.

That would be a welcome change, as Occidental recently slashed its dividend to just $0.01 per share. CEO Vicki Hollub cited break-even cash flow at oil prices in the low $30s, and so today's roughly $40 per barrel price has positive implications for the stock and future dividends. Analysts even see the potential for share repurchases if asset sales bring in substantial proceeds.

Energy stocks have been volatile, and they're also sensitive to the state of the economy. If crude prices stay at current levels or go higher, then it could help Occidental and its exploration and production peers dramatically. A broader economic recovery would free up capital for strategic deals like a purchase of Speedway, and that would be good news for just about every energy-related company looking to raise cash right now.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Marathon Petroleum Corporation Stock Quote
Marathon Petroleum Corporation
$102.79 (3.48%) $3.46
Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
$64.06 (4.25%) $2.61
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,490.89 (2.66%) $765.38
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,678.43 (2.59%) $92.81
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,575.62 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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