Oil prices have nosedived quite a few times in recent years. Each tumble has blown a hole in the cash flows of oil companies, causing their stock prices to tumble. Many have struggled to survive as these deep dives have caused wave after wave of bankruptcy filings.
However, while crude oil crashes have a devastating impact on most companies in the sector, they can benefit others. We asked some of our energy market contributors what stocks they think might win in the long run if there is another oil price crash. They came up with some outside-the-box ideas: BP (NYSE:BP), TC Energy (NYSE:TRP), and United Parcel Service (NYSE:UPS). Here's why they believe this trio could come out ahead if crude crashes again.
Proving the call
Reuben Gregg Brewer (BP): Would it really be so great for BP if oil prices crashed anew? On the surface, being that it is one of the largest integrated energy majors on Earth, the answer would be a very clear no. In fact, BP's top and bottom lines would suffer just like they did earlier in the year when oil prices dropped sharply. But there's a bigger issue at play here.
BP recently announced some huge changes. Underpinning those changes is the belief that global demand for oil has peaked. The company slashed its dividend by 50% and is planning to trim its oil production by 40% over the next decade. But BP intends to vastly increase its presence in the renewable energy space, with 40% or more of its capital spending budget shifted toward non-oil investments. It's already made some notable moves, including the recent $1.1 billion purchase of a 50% stake in two U.S. wind projects.
The big win for BP from another oil price decline won't be financial, it will be strategic. If oil prices start to fall again, it will give investors confidence that BP is on the right long-term path.
Insulated from oil price volatility and pivoting toward power
Matt DiLallo (TC Energy): Canadian energy infrastructure giant TC Energy has limited direct exposure to the energy market's volatility. Its business model focuses mainly on operating assets backed by regulated rates and long-term fixed-rate contracts. Overall, these sources back 92% of its current earnings and insulate it from fluctuations in prices and volumes. Because of that, another crash in crude oil won't put too much of a dent in its earnings.
Instead, TC Energy's earnings are on track to expand at a healthy rate for the next several years. The company sees earnings growing at an 8% compound annual rate through at least 2022. That supports its plan to increase its dividend -- which currently yields 5.2% -- by 8% to 10% next year, and at a 5% to 7% annual pace after 2021. Fueling that plan is a large-scale backlog of primarily natural gas pipeline projects and a life extension of a nuclear power plant.
Meanwhile, the company will likely pivot further away from the oil market in the future, which will make it even more immune to its fluctuations. It recently named the president of its power and storage segment as its next CEO, suggesting that TC Energy will likely focus on expanding that segment by investing in more renewable energy projects and energy storage opportunities. While the company plans to slowly shift more investments into the power market, another oil price crash could accelerate this move since it would reduce its near-term opportunities in the fossil fuel sector.
An added tailwind to an already great company
Daniel Foelber (United Parcel Service): Shares of UPS are up over 40% year to date, outperforming the market's 2% gain. Its success is best attributed to its surging U.S. business-to-consumer (B2C) segment, which grew sales an astounding 65% year over year in the second quarter of 2020. Although B2C sales traditionally have lower margins than business-to-business (B2B) sales, its U.S. operating margin fell from 11% to just 9.3%. This minor decline, paired with higher revenue, resulted in overall higher second-quarter earnings for UPS. UPS' ability to grow earnings during what was considered one of the most challenging quarters for the industrial sector in recent memory is impressive, but it isn't without one key favorable factor outside the company's control: lower fuel prices.
As one of the largest U.S. transportation stocks, UPS consumes a lot of gasoline, diesel, and jet fuel to power its fleet of 267 aircraft, 5,900 vehicles, and 22,000 trailers.
So far this year, fuel prices have been UPS' only declining operating expense compared to 2019. In the first half of 2019, UPS spent $1.63 billion on fuel, accounting for 12.5% of its total operating expenses. For the same period this year, it spent 22.6% less, or $1.26 billion, accounting for just 8.8% of its operating expenses.
Savings of $367 million is no small number, and it contributed significantly to the company's first-half net income of $2.73 billion. If crude oil remains low or falls further, UPS should continue to benefit from lower fuel prices. In the meantime, UPS will pay you to wait with a safe and reliable 2.5% dividend yield.