Crude oil prices have fallen sharply from their early March highs, seeming to lose the momentum they've had since trading briefly for negative prices in spring 2020. And we're not likely to see the volatility end anytime soon as producers and consumers face long-term and short-term changes in the market.
In the short term, demand could rise as the economy recovers from the pandemic, but in the long term we're seeing transportation vehicles move toward electric technology that's replacing oil. If oil prices continue to decline, three of our contributors think General Motors (GM -0.40%), Brookfield Renewable Partners (BEP 1.19%), and Phillips 66 (PSX -1.13%) will still be better investments than most oil stocks.
The automaker with EVs on the mind
Travis Hoium (General Motors): General Motors is one of the few auto companies that's in a position to benefit from lower oil prices and the transition to electric vehicles. But it could be helped tremendously by lower oil prices in the short term.
GM's profit today is really driven by truck and SUV sales, which are much higher-margin than car sales. And low oil prices mean consumers have more dollars in their pockets to buy vehicles and less worry about fuel efficiency. So, if oil prices stay low it will be a boost to GM's bottom line.
At the same time, GM is investing in building out an electric vehicle fleet that's going to grow significantly over the next few years. That transition is expensive and EVs aren't likely to be very profitable early on, so the profit from trucks and SUVs can both fund that transition and offset some of the lower-margin EVs the next few years.
An automaker that's promised to transition its entire fleet to EVs by 2035 may not be the kind of stock you think of benefiting from lower oil prices, which could make the transition to EVs slower. But GM has an interest in churning out as many high-margin trucks and SUVs as it can while it makes the transition to electric vehicles, and a drop in oil would be welcome news for 2021 sales.
Investor, owner, and operator
Howard Smith (Brookfield Renewable Partners): Falling oil prices typically aren't good for renewable energy investments. Even as the cost of power generation through renewables has come down in recent years, the higher fossil fuel prices are, the more incentive people have to swap to renewables.
A recent 10% single-week drop in oil highlighted how volatile the commodity can be, and prompted a deeper dive into how renewable investments can respond. One name that can win, no matter which direction oil heads next, is power generation investor Brookfield Renewable Partners.
Brookfield invests in and operates global renewable power assets in hydro, wind, utility-scale solar, distributed generation, storage and other renewable technologies. Demand for the company's more than 19,000 megawatts (MW) of generation capacity grows if oil prices rise and green energy generation becomes that much more competitive.
But even if oil resumes a rise in price, as one of the world's largest investors in renewables, Brookfield stands to gain from expanding growth opportunities. And Brookfield Renewable has the size and scale to make those investments impactful to its future success.
In 2020, the company grew funds from operations by 6%. The Biden administration has voiced its intent to grow domestic renewable power generation. In 2020, Brookfield acquired the remaining 49% of TerraForm Power that it didn't already own. With assets predominantly in the U.S., TerraForm provides contracted wind, solar, and distributed generation assets.
Regardless of the price of oil, the world is moving toward a smaller fossil fuel footprint. Of its 2020 accomplishments, Brookfield Renewable said, "Across our portfolio, we continue to focus on partnering with a broad range of customers in their decarbonization efforts." There will be benefits to investors and owners of renewable power generation like Brookfield, whichever way the price spreads swing.
In the right place in the value chain
Jason Hall (Phillips 66): Last year was Phillips 66's worst year ever as a stand-alone company. The crash in oil demand during the coronavirus lockdowns in the spring and summer hit its volumes hard, resulting in substantial losses from its refining business, which can usually count on steady, predictable demand for transportation fuels. Surprisingly enough, it wasn't the big drop in oil prices that hit the company hardest; it was simply the drop in demand, which resulted in very low utilization rates for the company's refineries in 2020.
That's because Phillips 66 doesn't produce oil; it's a buyer. And with some of the most advanced refineries on earth, it's often able to take advantage of the spread between different kinds of crude prices to get low-cost oil that's more profitable for it to refine than the benchmark crudes that set gasoline, diesel, and jet fuel prices. In other words, investors looking for good value in the energy market shouldn't skip Phillips 66 just because oil prices are getting volatile again.
There's even more to like. Phillips 66 is one of the largest natural gas pipeline operators and petrochemical manufacturers in North America -- more businesses that will get a boost from improving economic activity.
Put it all together and every aspect of Phillips 66's business is set to get a boost in 2021 and beyond, as the world moves beyond COVID-19. Phillips has a dividend yielding over 4% at recent prices and a history of raising the payout in most years; don't let volatile oil prices make you overlook Phillips 66.
More than the price of oil
With each of these stocks, oil prices play a role in their future, but falling oil prices aren't necessarily a bad thing. These companies are built to endure volatility in the oil markets and that's what makes them great buys today.