Tuesday is looking like a bad day to be invested in oil stocks, as downbeat news in the oil sector takes a toll on shares of oil majors ExxonMobil (XOM 1.57%), ConocoPhillips (COP 0.88%), and BP (BP 1.07%).
OilPrice.com is reporting on a "plunge" below $75 a barrel in Brent crude prices (currently $74 and change). WTI crude -- more popular in the U.S. -- is suffering a similar fall, down 3.8% at about $70.70 as of 10:30 a.m. ET.
Exxon stock is down 3.2% in response, followed by BP at a 3.5% decline, with Conoco bringing up the rear with a 3.7% loss.
NYSE: XOM
Key Data Points
What's ailing oil stocks today?
OilPrice.com lays the blame for today's sell-off squarely at the feet of OPEC -- or, more precisely, OPEC+, which includes Russia and other oil producers not part of OPEC proper. Aiming to stabilize oil prices in the wake of a production cut from Libya, OPEC+ is reported to be planning to gradually increase production beginning in October, a move that would increase oil supplies and thereby lower oil prices.
What's interesting, though, is that the size of the OPEC+ production increase -- set to begin at just 180,000 barrels per day (bpd) -- will barely blunt the loss of Libya's 700,000 bpd production. Viewed in isolation, therefore, this seems a weak catalyst to do so much damage to oil prices today.
But a second factor is also weighing on oil prices: China.
It's the globe's biggest importer of oil, and Reuters reports that manufacturing output in the Middle Kingdom has fallen to a six-month low. Furthermore, the nation's purchasing managers' index slipped from 49.4 to 49.1 in July, indicating the economy is in a state of contraction currently. OilPrice posits that this is "bearish" for Chinese oil demand. And if Chinese demand is falling, that means global demand is also falling. And if you took Econ 101, you know what that means: Oil prices will fall as well.
Which is exactly what we're seeing happen today.
Is it time to sell oil stocks?
Now here's the good news: Oil is well known to be a cyclical industry, one in which strong prices are followed by weak prices and vice versa. If you can be patient, therefore, it's likely that oil prices will improve, and with them, the popularity of oil stocks like Exxon, BP, and Conoco.
And it's not as if these three stocks are terribly expensive!
Valued at 14 times trailing earnings, ExxonMobil stock is the most expensive of the three. With long-term forecasts for 6% annual earnings growth and a dividend yield of 3.2%, Exxon stock costs more than I'd be willing to pay. But with a P/E ratio that's less than half the S&P 500 index average of 29, Exxon still offers a relative bargain.
Conoco's valuation is similar but better. It pays a slightly smaller dividend of 3.1% but has a slightly better forecast growth rate of 7%. And at a valuation of just 13 times earnings, Conoco stock is a bit cheaper than Exxon.
NYSE: BP
Key Data Points
My favorite of these three oil stocks, though, is BP. Costing just 13 times earnings, like Conoco, it pays a much better dividend yield of 5.7%. Earnings growth should be tremendous next year -- as much as 57% -- as BP bounces back from a weak 2024. And the British oil company boasts a powerful $16.3 billion free cash flow that is more than twice its reported net income.
Call me an Anglophile if you like, but I like BP stock better than either Exxon or Conoco stock today.
