Oil prices have been rising for the past few weeks as promising data has come about the effectiveness of Covid-19 vaccines and production has remained relatively low.
On Friday, Brent crude futures, the international benchmark, rose to just shy of $50 a barrel, a key level that could signal a sustainable return for oil companies. West Texas Intermediate crude futures, the U.S. benchmark, was up 0.4%, to $45.81 a barrel, on Friday. It has risen 15% in the past month.
But the price rise hasn’t affected all of the stocks in the same way. And a further increase will ripple through the industry in different ways.
Some stocks are more leveraged to the change in prices than others, and can in essence offer investors a supercharged way to bet on changes in the value of oil. Of course, with large potential rewards comes significant risk, too. Oil prices could also fall for a variety of reasons, including a faster-than-expected buildup of inventories in storage. If vaccines take longer than expected to roll out, for instance, oil could fall quickly because a return to normalcy would be delayed.
MKM Partners analyst John Gerdes analyzed more than 30 oil and gas stocks based on their sensitivity to changes in the prices of oil and natural gas. The stocks that are most sensitive to changes in the commodity prices tend to have higher debt and higher break-even prices, meaning that they depend on commodity prices rising to be able to produce sustainable free cash flow.
His base case is that West Texas oil prices rise to $55 a barrel by 2022, and hold that level, and that natural gas prices stay around $2.80 per million British thermal units. (Both are slightly more bullish than consensus Wall Street estimates.) Natural gas futures were trading at $2.55 per million BTUs on Friday.
The seven companies most sensitive to changes in prices are: Laredo Petroleum (ticker: LPI), Antero Resources (AR), SM Energy (SM), QEP Resources (QEP), Callon Petroleum (CPE), Southwestern Energy (SWN), and Murphy Oil (MUR), according to Gerdes.
Each of those stocks could more than double if oil prices rose to $62.50 and gas rose to $3.05, he projects. Laredo could actually quadruple in that event. They would all rise at least 30% if oil holds at $55 and gas is at $2.80, and Laredo would more than double. Of the most-sensitive stocks, Antero and Southwestern are more dependent on gas, while the others are more oil-sensitive.
Leverage can goose stock returns. The top movers tend to have higher-than average debt levels as compared with their adjusted operating income.
That has made them vulnerable to price drops, too. Many of the most-sensitive stocks have fallen sharply since early in the pandemic. Laredo’s stock is down 76% this year.
The stocks that have the least sensitivity to price changes include gas producer Cabot Oil & Gas (COG), oil producer Concho Resources (CXO), and Exxon Mobil (XOM). Cabot and Concho have particularly low debt loads. Exxon is less sensitive in part because of its diverse business model — it makes money in areas like refining and chemicals, which tend to respond differently to changes in oil prices.
Write to Avi Salzman at firstname.lastname@example.org