Crude oil prices are trading in the $95-$99 range, a pattern than has repeated itself in recent weeks as oil traders wonder if crude has enough in the tank to crest the benchmark $100-per-barrel mark – and stay there.
It’s a fair question and one that is being answered decidedly in the affirmative by Uncle Sam.
According to the U.S. Energy Information Administration, both the short- and long-term outlook for oil prices is upward.
Right now, the focus is on Hurricane Isaac. For energy investors, the timing, while important from a safety issue for Gulf residents, is one issue. But another is the fact that several oil refineries have already shut down across the Gulf of Mexico, which could trigger a chain of events leading to a shortage of oil, and subsequently higher crude oil prices for consumers.
There are strong rumors that the Obama Administration could ease some of that pain by releasing oil from the U.S. Strategic Petroleum Reserve.
Regardless, the volatility and uncertainty surrounding Isaac should drive oil prices higher for the short term. For the long term, the IEA has upgraded its price levels for both Brent and West Texas Intermediate Crude oil prices for the rest of 2012 (as follows):
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Category Last Estimate New Estimate
West Texas Crude $92.00 $93.90
Brent $106.00 $108.00
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What oil stocks should be best poised to leverage a run-up in oil prices, especially if Hurricane Isaac wreaks similar damage to Katrina in 2005?
Exxon is one obvious target, especially since it just paid out a dividend (at 0.57 cents per share), a sure-fire way to draw more investors into the fold. Its stock has already moved from $85 per share in early August to $88 per share at month’s end.
Exxon was also one of the first oil producers to shut down its Gulf of Mexico drilling sites with Isaac looming on the horizon. That should protect and secure drilling assets and leave Exxon well-poised to resume operations quickly once Mother Nature calms down in the Gulf region.
Another strong candidate for a share price boost is Rex Energy, an independent oil and gas company with substantial operations in the Appalachian and Illinois basins.
Rex has oil traders and money managers buzzing this month. Capital One just upgraded shares of Rex from an “Add” outlook to a “Strong-Buy” outlook.
Its Utica shale outlook, in particular, has drawn attention from Wall Street. Its current stock price, at $13 per share, stems from solid earnings numbers last quarter, and Capital One sees the stock climbing to $18 to $20 per share. One note, some early buyers have already driven REXX up by 30% in recent weeks, mostly on that stellar second-quarter earnings report, which saw production on a year-to-year basis rise by 78%.
Rising production is a big advantage in a landscape where demand should be growing for oil, and that’s exactly where Rex Energy is right now.
Another is Seadrill, a deepwater drilling firm that just announced a $4 billion commitment for 19 rig years on three ultra-deepwater units.
The analytical firm Natixis set the tone for SDRL, boosting the stock from a “Reduce” rating to a “Hold” rating. A big reason for that upgrade were comments from
Rune Magnus, Seadrill CFO, when he told analysts in an Aug. 27 conference call that the drilling firm has a big backlog of orders and is well positioned to take advantage of stronger demand for oil.
“We have since our first-quarter report secured contracts and commitments totaling some $7.6 billion, bringing our order backlog to a record-high level of $20.3 billion,” Magnus said. “This reflects a very modern drilling fleet, strong operational track record, excellent customer relationship and the strong demand for offshore drilling services.”
Sure, Hurricane Isaac is a huge wild card this week, and investors can reliably expect a big bump-up in oil prices if the storm’s damage is extensive.
But, as the IEA reports, the longer-term underpinnings for crude oil prices are solidifying, and oil prices could be set for another run-up.
In the meantime, Exxon, Rex Energy and Seadrill are all worth a look. If oil prices do take off, these stocks could go along for the ride.
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