Is Oil Still King? Why Oil Stocks Look Highly Discounted

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The oil industry is one of the hardest hit ever since the COVID-19 pandemic triggered lockdowns and social distancing policies. Demand for the black gold plunged to all-time lows with prices following suit and crashing below the negative level. Thus, it does not surprise that oil stocks followed suit, plunging, and struggling to bounce back as the overall market recovered.

Oil Companies Woes

Exxon Mobil Corporation (NYSE:XOM), which at one time was the most valuable company in the world, is facing its biggest test yet. The company has already been kicked off the Dow Jones Industrial Average, its market value has contracted significantly in the wake of oil prices plunging to decade lows. Chevron Corporation (NYSE: CVX) is another company reeling from the effects of the COVID-19 pandemic that has taken a toll on the sector’s opportunities.

Capital cuts have become the order of the day, as oil majors seek to conserve cash flow that seems to be drying at an alarming rate—two consecutive quarters of losses by Exxon Mobil and Royal Dutch Shell plc. ADR (NYSE: RDS.A) alludes to the change of fortunes in the oil industry.

Focus on Renewables

Amid the woes in the oil industry, renewable energy sources appear to be thriving. Solar production in the U.S has been growing by the day, clocking record highs of 90 billion kilowatt-hours last year from zero as of 2005. Wind power has also grown immensely to 300 billion kilowatt-hours as focus slowly shifts towards renewable energy sources.

Amid the growth of renewable energy sources,  they still account for a small portion of the total energy requirements in the U.S. Fossil fuels led by oil are still king accounting for a massive chunk of the 4.1 trillion generated. Solar and wind power are mostly used in power generation in servicing the grid with electric cars accounting for only 2% of the U.S auto fleet.

Likewise, fossil-based energy sources are not going anywhere. The oil will continue to power most energy needs in the U.S, even as electric cars continue to elicit demand. While it is projected that by 2050 renewables will make up 28% of the global energy consumption, it is not 100% or anything close. Similarly, oil stands to remain king for the foreseeable future, expected to account for 32% of total power needs by 2050.

Discounted Oil Stocks

The uncertainty in the oil industry owing to the COVID-19 pandemic might as well have presented an ideal investment opportunity. Most counters led by the likes of  Exxon Mobil, Chevron, and Royal Dutch Shell are trading at a significant discount even as it remains clear that carbon-laden energy sources will remain around for the foreseeable future.

Exxon Mobil has so far shown it has what it takes to bounce back whenever faced with uncertainty. Its stock peaked in 2013 to highs of $101 a share before tanking in 2015 by 25% amid a glut in supply in the oil markets. The stock recovered in 2016, rallying once again to highs of $93.

After a recent plunge, the stock appears to have found support above the $40 a share level backed by sufficient resources and cash on hand. A bounce back from current levels looks likely as fundamentals in the oil industry improve with the easing of COVID-19 effects.

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