Shares of U.S. shale producers Ovintiv (OVV -0.32%), Devon Energy (DVN 0.45%), and Diamondback Energy (FANG -0.09%) rallied hard today, climbing 10.8%, 5.6%, and 5.8%, respectively, as of 2:52 p.m. ET.
Ever since the Federal Reserve hiked interest rates by 75 basis points back in mid-June, the high-flying energy sector has crashed, with many names down some 25% or more in just that short a period of time. However, with their stocks now at dirt cheap prices based on current oil price levels, investors may be getting back into these names.
In addition, bullish news on both the demand side and supply side has oil prices bouncing back higher today. In company-specific news, Ovintiv sold a big asset today, which will help it de-lever its balance sheet. That could be why the stock is moving higher than the others.
Amid its flagging economy and various outbreaks of COVID-19, China's government fast-tracked the sale of $220 billion in bonds for local governments this year to stimulate the economy. Oil prices surged in recent months even as many major Chinese cities were under lockdown and the economy stalled. While not specifically aimed at fossil fuels, better economic activity is good for energy demand, so this announcement from last night is no doubt boosting energy names today.
Meanwhile, some supply concerns still remain. For instance, a Russian court just ordered a 30-day stoppage at a crude export terminal due to pollution violations. Unrest in Libya has also curtailed that country's output. Meanwhile, while crude oil stocks rose in the U.S. last week, that was because refiners cut output for maintenance, not because of declining demand. The Energy Information Administration also showed gasoline stocks fell more than expected, and commercial stocks of oil are about 10% below normal levels for this time of year.
When you combine China stimulus and concerns over supply with the recent drop in oil prices over the past three weeks, it's no wonder these stocks are bouncing today. Ovintiv, Devon, and Diamondback are pure-play producers and therefore price-takers of oil and natural gas prices, with their asset bases largely based in U.S. shale basins.
In terms of company-specific news, Ovintiv announced it had reached agreements to sell parts of its Bakken and Uinta assets to private counterparties for $250 million. As a result, Ovintiv will bolster its balance sheet, allowing it to return more cash to shareholders more quickly. Prior to the deal, Ovintiv had scheduled returning 50% of its free cash flow to shareholders after Oct. 1; however, with this asset sale, the increase in shareholder returns will happen this quarter.
Are oil stocks headed for a big rebound, or is this bounce part of a further decline? For sure, each of these companies looks quite cheap at these levels, as each stock mentioned above is trading at a mid-single-digit multiple of next year's earnings. That means high dividends and accretive share repurchases today.
However, remember that oil stocks generally track oil prices, which have been highly volatile this year, both to the upside and the downside. As I've written recently, investors should perhaps keep their exposure to energy stocks fixed as a percentage of a diversified portfolio, perhaps adding on dips and selling after big gains. Since oil prices have such an effect on inflation and the overall economy, energy names can add much-needed diversification to the non-energy names in your portfolio.