Oil prices (NYSEARCA: USO) are on the rise and likely heading higher. The Saudis and Russia are working together with voluntary production cuts to keep the supply/demand balance tilted firmly in favor of higher prices. Because of this, demand is expected to outpace growth through 2024 and support higher prices for oil over the long-term and drive results for the energy sector.
The takeaway is that energy companies had a sluggish quarter in Q2 of 2023, but this is the bottom for their results, and another round of windfall profits is on the way.
WTI is showing a clear floor at $65. This floor is put in place by OPEC+, the Saudis, and Russia and may only be broken by an increase in global production, which is unlikely, or demand destruction, which is becoming less of an issue.
The price of WTI is on the verge of breaking out of its consolidation range. In that event, the price will likely trend higher and move back into the $90 to $100 range or higher, given time.
Speculators and traders may want to play the oil market directly, but investors will want to choose solid companies with a track record for delivering results.
The Energy Sector ETF (NYSEARCA: XLE)
The Energy Sector ETF (NYSEARCA: XLE) is a fine choice for broad exposure to this sector. The ETF pays a solid 3.6% dividend and is biased toward distribution growth. The payout tends to ebb and flow with the sector's success, but the trend of peaks and troughs is upwards, and the current trough is well above the pre-pandemic period.
The top holdings are Exxon Mobil and Chevron, the 2 largest integrated oil companies in the US and top-10 players globally. They comprise roughly 40% of the holdings and are rounded out by oilfield services names like Schlumberger and mid and downstream operators.
The chart of XLE is promising. The market has been consolidating within a trading range and formed a Symmetrical Triangle. The market broke out of the triangle pattern to the upside, signaling a new bullish trend.
The trend will likely move up to the top of the trending range near $95, about 10% above the current action and may move higher. A move above $95 opens the door to a retest of the all-time highs near $100, another mid-single-digit gain for the share price.
Exxon Mobil For Long-Term Distribution Growth
Exxon Mobil (NYSE: XOM) is a singular choice for investors because of its market position and ability to produce cash flow and pay dividends. The company recently reported a 28% decline in revenue tied to the fall in oil prices and deleveraging to go with it. Still, the $1.94 is sufficient to maintain a robust dividend outlook. The payout is below average for the sector at 3.4% but has a reliable track record for growth.
The company has increased the payment for the last 24 consecutive years and is in an excellent position to continue raising the payout. The rate of annual increase isn’t large, low-single-digits but compounded by share repurchases. Shares of XOM also show signs of solid support and an upward bias in the price action.
Occidental Petroleum: Buffett Likes It
Occidental Petroleum (NYSE: OXY) is the 10th largest holding within the XLE and about 3.25% of the holdings. The stock is not the highest-yielding one with a payout below 2.0%, but it is among the best-positioned to deliver value to shareholders. That’s probably why Warren Buffett likes it.
The company did not use the windfall profits of the last 2 years to increase the dividend or repurchase shares significantly but to pay off debt and reposition the capital structure in favor of shareholders. That’s why Buffett is buying the stock; he and Berkshire Hathaway have been buying in large quantities and own more than 25% of the company.
The Buffett Bottom is near $58, and the market is moving higher from that level. Investors might expect to see the share price trend higher over the next few years, driven by its results, cash flow, debt reduction, and dividend increases.