What happened
Shares of oil and natural gas companies were on the rise Friday, with U.S. large caps Chevron (CVX 0.08%), ExxonMobil (XOM -0.05%), and Devon Energy (DVN -0.98%) up 2.3%, 4.3%, and 5.1%, respectively, as of 3:30 p.m. ET.
Their synchronous upward moves came as Russia announced a 500,000-barrel-per-day cut to its oil production, an unusual move in that it was taken without coordination with the OPEC+ group in which it participates.
Less Russian crude on the world market would mean potentially higher oil prices -- however, some analysts argued that the country made the move out of necessity, rather than intention, in the aftermath of the new sanctions put on Russia by the European Union, the Group of Seven (G7), and Australia in December.
So what
Back in December, the G7 (of which the U.S. is a member), the European Union, and Australia put new sanctions on Russian oil -- most notably, a $60 price cap. This move was intended to keep Russian oil on the market while limiting the funds that its sale would bring to Russia. In response, Russia said it would not sell oil to any country that was participating in the price cap plan.
However, that also meant that the remaining countries Russia was still willing to sell to -- notably, India and China -- would likely be able to negotiate more favorable prices for the oil they did buy.
Fast-forward to Friday, when Russia announced it would be slashing production by a little less than 5% of its total output. Given that Russia produces about 10% to 11% of the world's oil, that amounts to about a 0.5% cut in the global oil supply.
While Russia is touting this move as a retaliatory action that will keep some crude off the market and perhaps increase the price at which it can sell its oil, some analysts actually think it may be cutting output because it can't find enough buyers for the oil it has been producing. That could be a sign the sanctions fashioned by the Biden administration, the G7, and their European allies are working.
Regardless of whether Russia is merely attempting to get a better price for its oil or it's unable to sell as much as it wants, the move sparked a rally in oil prices. The price for U.S. benchmark West Texas Intermediate crude was up by about 2.3% to nearly $80 per barrel as of this writing.
Unsurprisingly, oil and natural gas stocks rose in response, with pure-play producers such as Devon Energy rising more than more diversified oil majors like Chevron and ExxonMobil. Chevron and ExxonMobil are a bit less sensitive to oil prices, as they also have vast midstream and downstream operations. Those are spread businesses, and their earnings don't necessarily rise and fall with the price of oil in the way that those from upstream businesses do.
Now what
As Friday's action showed, it's probably a good idea to have some exposure to oil and natural gas stocks, given that geopolitical events have the potential to disrupt supplies at any given moment. And while oil prices may not rocket back up to the multiyear highs they touched last June, it also appears unlikely oil prices will crash back down to the $40 to $50 range they tended to occupy after the shale boom and bust last decade.
Given that the industry appears to be more consolidated and disciplined in its supply growth, and given that most oil stocks are trading at high-single-digit or low-double-digit price-to-earnings multiples at these oil price levels, most investors should have some exposure to the sector, even though the worldwide efforts to combat climate change will probably prevent much multiple expansion for these stocks for the foreseeable future.
Yet their low valuations provide these companies with the opportunity for accretive share repurchases and high dividend yields. Chevron and ExxonMobil have already reported this earnings season, with each beating revenue expectations and announcing large stock repurchase authorizations. Meanwhile, while Devon does repurchase some shares, it devotes most of its free cash flow to its variable dividend payouts, giving it a high yield. Of note, Devon will report on Feb. 14.
