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This is the Value Investor Podcast with Tracy Reineck. All things value, all the time.
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Welcome back, value investors. So it's time to look at oil. We've looked at oil off and on since the start of this podcast about 10 years ago, I guess it is now. And it's had its ups and downs. All of the energy stocks, sometimes they've been cheap, sometimes they have not been. And we've looked to see if they're a value or a trap. I'm not looking to see if they're a trap right here because of what's going on with the Iran war, the price of oil and supply chain disruptions. Everything that's going on in the Middle east right now is going to change the earnings quite dramatically for most of the producers. But what I do want to talk about is if you're interested in getting into some energy stocks and you're hoping to find it a little bit on the cheap side right now as a value, then what, what do you buy? And specifically on this podcast, I wanted to look at the producers, the producer side, because as you know, there is those who drill for the oil and then there's also the services side. That is the side that looks for or that helps these companies drill for the oil. And then there's even a third side, there's the refining side. And that is those who take the oil and turn it into other products like gasoline. So I just want to focus on the producers right here because they are the best bet if oil prices rise. Right now. Most of them are not hedged. And hedging is used in the oil industry to make bets about a rise in oil prices or a decline in oil prices to give you some knowledge of where the price will be. It's kind of like taking on a mortgage in some ways, if you have a mortgage and it's a fixed rate mortgage instead of, you know, one that is not a variable. If it's fixed, then you kind of know where you stand, you know what your monthly payment is going to be over the course of several years. So that's what this is like with hedging. But most of the producers have gone unhedged. So when the price of oil has declined in the past two to three years now, then their earnings have declined because they're, they're just getting for their product whatever is on the open market there. And it has been under $70 a barrel for WTI in the last year, give or take a little bit. But it is mostly remained under 70 in 2025. But now we're in 2026 and prices were expected to remain on the lower end. Earnings estimates were still looking pretty pathetic because most didn't expect pricing to turn around until 2027, when the supply was expected to shrink a bit. But now we've had the Iran war for about three weeks now affecting the Strait of Hormuz, as you all know. And the oil supply there has been hit about 10 million barrels a day off the market. And that doesn't include everything else that's going on, I guess Libya has shut some production off a pipeline at the moment. So there are always issues going on globally that have to be accounted for, but nothing of the magnitude of 10 million barrels a day. This is the largest interruption in oil production since 1950 on a per barrel basis. So it's not surprising that oil is on the rise right now. WTI is trading around 100. It's at, you know, in between 95 and 100 right now. But the physical market is much higher. That's if you're actually buying the barrels from, say, Oman, you are paying anywhere from 150 to 173, apparently on the market. So little bit different if you're actually taking possession of these physical barrels are out there that are charging more. So what should you be looking at for the producers right now? The industry ranks are pretty terrible and that's why I've been avoiding oil stocks, because those earnings were looking very trappy, so to speak. They were still on the decline, maybe they were going to bottom this year. But the stocks themselves hadn't really broken down either. So they were a little pricey for the falling earnings. And, you know, it's just not making for good industry ranks, let alone regular Zach's ranks on each individual company. But there are certain things you should be aware of if you're looking to invest in oil stocks once again. So there is such a thing as the big oils, and those are the integrated oils, as they're so called on Zachs.com these are the Exxons and Chevrons of the world. And integrated or big oil means that they do more than just the production. They may have chemicals, they may have refining, they may own service stations which Exxon and Chevron both own. So they have, you know, multiple streams downstream, upstream. And so they're more than just drilling it. They have all these other businesses going on. The reason I'm not a big fan of big oil right here is because most of the big oil companies have some kind of exposure in the Middle East. They may have be drilling there and have big facilities there that are in the danger zone. Several US Big oils have had to evacuate personnel out of that region. Total Energy, which is the French big oil giant, they have said that they have shut about 15% of their total production because they've shut in Qatar and Iraq. So. And that doesn't even call into play if there's any damage ever done to their facilities during this war. So I'm staying away, staying away from those big oils right here. Even though I think many of them are excellent companies, they just have a little more exposure than I would like there in the Middle East. So you can find just North American producers and you can search for these on Zacks.com on a stock screen because we have categories that are oil and gas exploration and production, United States and we have one for Canada. So I like both. Any, any of these producers looking, you know, producing, drilling in the US Or Canada are a better bet, a little safer than those that are over in the Middle east and have more exposure over there. So I put in oil and gas exploration, production, United States to look at those stocks and kind of see what was going on. It's been a while since I looked at these because all I knew was that earnings were falling. The Zach's rank was terrible. I could do, you know, a bear of the day on a lot of these stocks because those estimates keep getting cut. But I found out the industry rank is in the bottom 40% on this industry. Again, not a surprise. What is a surprise is that year to date, this whole entire group is actually up 29% while the S&P 500 is down 1.6 now year to D. So that's not too shabby. But that is a result of everybody diving in now as the price of oil rises because most of these companies are unhedged. We have no Zachs number ones which are the strong buys or number two buys because those estimates were being cut. However, I have noticed just taking a look at some of these now, that estimates are now being revised higher in just even the last week. And so we will see some more changes in the ranks. We will start to see some twos and some ones as if this goes on. But also something to remember about the price of oil is that it can rise quickly and then it can take a while to decline. And in this case we have a supply shock. Not on the demand side, but you're going to need some demand destruction to get an equalizing in the supply and the demand category. And then you will See, the prices of the barrels start to decline, but when we get there is unclear. So it does take a while to get demand destruction. This is the opposite of what happened in Covid when there was a. There was already a demand destruction when the global economy shut and there was too much supply. So crude went to negative $37 a barrel suddenly on that huge disparity. And it took a while for it to get back into more of a balance. You know, it meant supply had to be taken off the market. People had to cut their barrels. Drilling, you know, slowed, rigs were shot. But that takes time. In this case, we're in the opposite scenario. So the price has spiked, demand remains high. We need to get that demand down. But if the price again gets high enough, you will have falling demand eventually, but it's going to take a while for that price to come down. So for instance, let's say you want to start up your rigs now. It's a lot easier to shut down rigs than it is to restart them. It can take up to six months to get some of those rigs back online and going again. So that's where the decline in oil prices is slowed and really does take time. Now, we already are seeing releases from various strategic petroleum reserves around the world, the SPRs. But even combined with everyone now tapping their SPRs, it's only about 2.5 million barrels a day and we are down about 10 million in this war. So it's still not going to be there on the supply side yet. So we're going to have to wait for demand destruction, and that's going to take time. So in the meantime, the earnings are going to adjust on a lot of these companies as oil remains high, especially if we can get it over 100 consistently for a quarter or even longer, perhaps then we'll really see the analysts revising those estimates higher. Now, another thing to remember about the earnings estimates, and this is what we saw in the Ukraine, Russian war as well, with the spike in oil during that in 2022, is that the analysts will always be behind. No one knows when it's going to end. No one knows if it's going to get worse. No one really knows full impacts or what the pricing is really going to be for an entire quarter in this case. No one knows if some facilities might be damaged for some oil companies that, you know, are drilling over there in the Middle East. So there's a lot of ifs. And the analysts will kind of remain on the sidelines waiting to see what happens. They May in this case start to get a little more bullish as oil remains higher here for several weeks. But it's going to take some time to get those ranks up and to get the analysts to move. So it's going to be delayed. Delayed number ones and number twos. That's why I'm looking at these stocks now, because the ranks will change, but we're getting ahead of it. So just looking at the list of the U.S. oil producers, we have 33, 33 entries. Some of these are also natural gas that's mixed in here. So I'm going to try to stick with oil for this episode. And I have a couple that I have looked at over the years and we looked at during the Ukraine and Russia war. And they're back. They're back on the scene. So let's start off with a couple of the big guys and I want to just take a look at what is happening with their earnings estimates now. Are the analysts doing anything? So the first one I would consider is Diamondback Energy ticker thing. This is the original thing. Remember, F A N G is the ticker. They are a number three. They're big cap. 52 billion in market cap shares have been on the move this year and certainly are. Now that oil is moving this year, earnings are expected to be down 27.8%. But that was before the Iran war and now we're into the new, newer scene. But interestingly, for next year, 2027, the analysts did see a turnaround of 24%. That's what I meant about, you know, the turnaround coming next year. The analysts all were assuming we would get, get that more stabilization and get the turnaround in oil prices into next year, which would push up earnings. But now we're getting it in 2026 instead. So let's take a look at the detailed earnings estimates because that's really going to tell us the real story, what's happening here. And we had a mixture prior to the Iran war, we had some estimates up for 2026. We had a bunch down. It was split pretty much 50, 50 people getting in line with what was going on pre war. But now two estimates are higher in the last week alone. So some analysts are like, we're not waiting around, you know, to see what's going to develop. The earnings are going to rise here. And so they're raising already. So two up for the year. We have one higher for the quarter and one lower in the last seven days, actually, and then one higher also for next quarter. And just Taking a look at what the quarterly estimates are doing now, so we have 241 now for this first quarter and seven days ago it was at 220. So that's up 21 cents. Next quarter, second quarter we have 234 and it was at $2. So that's up 34 cents. So right there we're already seeing a pretty significant jump just in those two quarters. And then for the year, they're up A$5. In the last week, we're now at 1020. We were at 9:15. So that this is the result of the Iran war. The analysts, a few of them are already starting to go in, but others will be more cautious and kind of wait on the sidelines. How long is oil trading? Over 90. If it can hold it, you know, multiple weeks further, then you are really going to see even more changes to these earnings estimates and you're going to see the Zacks rank. You might get a number two rank. That kind of thing is going to happen even before any kind of earnings. But that's still a decline of 23% again for 2026 because they made 1337 last year. And now 1020 is expected. So things are turning around and can turn pretty quickly in this kind of situation. So Diamondback Energy, I said, was a large cap. They are in the US and they are a Permian driller. And so that's what we want. We want us there in the Permian, the Dean, the Wolf Camp formations, their Midland Basin. I'm reading off their website. So anyone who knows oil knows all of these areas. That's all in Texas. There looks like maybe a little bit in New Mexico as well. So no problems with any exposure to the Middle east with Diamondback? What about valuations on Diamondback now? That's the question, right? Because a lot of these stocks haven't, like I said, haven't really broken down. So they were not super cheap because the earnings are declined. They haven't broken down. So we're still getting pretty elevated pes. But that will change if this oil spike holds. The forward pes will drop as those earnings turn around, even if the stocks, you know, continues to rise. So forward PE of 18.3, that's not terrible. It's not historically a value stock, but we're buying the future earnings. We're, we're even buying, you know, end of this year earnings, which they're not even pricing in yet. Price to book is only 1.3. So that is a value. So there is still value here if you, if the price of oil holds at these levels for a number of weeks, we definitely are getting in at a cheap level. You get a dividend yielding 2.2%. These big cap producers have been very generous with dividends and share buybacks. They have good balance sheets. They have to keep you in the stock while the earnings are on the decline. So they are very shareholder friendly. And Diamondback again, one of the bigger names in US production as a standalone outside of the big integrateds. So Fang is the ticker there. F A N G. And then I want to talk about another big cap which is EOG Resources. We've talked about them numerous times too. They're kind of considered one of the top now as well along with Diamondback of the big drillers. 72 billion market cap. I recently did add this to the value investor portfolio at Sachs to be a play on oil. But I was thinking because I know EOG is big in the US in the Permian. They're also in Utica and Eagle Ford is where they're drilling. But they have suddenly started drilling in the Middle East. They have an agreement, joint agreement. I am laughing about this because the timing couldn't be worse for them. Right. They were excited to expand into the Middle east with these partnerships with the UAE and Bahrain and they're doing horizontal drilling there. They entered into this agreement last year and they've started some drilling apparently in February and now here we are. So they do have some exposure. But I still like them for their non exposure because that's where most of their business is generated. They've only just started doing anything in the Middle East. So it's not really going to be like Total which is going to get hit by 15% of its production offline. This is very small. That's over in the Middle East. So even if that's halted or you know, they're not getting anything from that, everything else is where I'm placing my bets. So they are very shareholder friendly. They've been doing a big share buyback plan. They bought back about 10% of the shares since 2023 and they're paying a dividend, a standard dividend. Last year their free cash flow was 4.7 billion and they paid out 100% of it to shareholders. And that's to keep people in the stock. Again, it hasn't gone anywhere since 2023. It's traded in a narrow trading range like a lot of these oil stocks have done. They haven't broken down, but they haven't broken out. They're just kind of sitting there. So you are getting paid for your patience with the share buybacks and the dividend they are paying $4.08 right now yielding 3%. It was up 8% last year, so the dividend rising a bit. But they're also buying back shares so it's going to rise a little bit just from doing that. EOG is a little bit cheaper forward PE of 13.7. Earnings expected to fall 7.2% this year. But that's off of what you know, before the pre war analysis. And we are starting to see some revisions now coming in as well on eog. These are probably the same analysts from Diamondback. You know, they're looking across their whole portfolio and deciding to make some changes. So for the first quarter there's two estimates up in the last seven days. None have been cut. They're now looking for 245 versus 231 then in 20 or second quarter 2026, two are up, one is down however. But they're now looking for 235 versus 207 for the second quarter and then for the full year it's up almost a dollar for the full year to991 from893. Three are higher for the full year and one is lower still in the last seven days. These are all last seven days and then we have a split for 2027. One up and one down. But that's, that's still pretty far out. So not as many people are messing around in the last seven days with 2027. So EOG Resources is another way. If you're looking for one of these big caps that's also very shareholder friendly. Their balance she very good. They do again have a small exposure to the Middle east but not like a Total or an Exxon or a Conoco. So I still like it because it's mostly North America. So E O G is the ticker. And then I wanted to look at maybe one of the smaller drillers and we know some of them as well from a couple of years ago. But one that has come up many different times in my screens is Magnolia Oil and Gas. This is a lot smaller company, market cap of 5.5 billion. And this one I haven't looked at in years now but so it's pretty interesting to look at it right now. And this one actually has shares breaking out to new five year highs on what's going on. Earnings expected to be down 21% this year. Not a surprise. They were down 16% in 2025 and then rebounding 26 in 2027. But again, this is the old look which will be changing and might be changing right now. Ford P 16.8. That's not a surprise either. They are in the Eagle, Ford and the Austin chalk formations in South Texas. But with that market cap of just 5.5 billion, they are much smaller than some of the others that I've just talked about. They do pay a dividend. It's yielding 2.2% right now. So again all these companies realize they have to pay out something to keep investors around. But we're starting to see estimates rise even on the smaller which are less covered companies like magnolia. So one estimates higher for the first quarter. In the last seven days none have been cut. They're looking for 43 cents now up from 39. Then second quarter also similar. One is up now looking for 42 cents up from 36 and then 2026. We have two estimates up in the last week. None have been cut. But in the 30 days it was two up, one was cut. So it was kind of mixed in the 30 days. But that was then before the war and now this is after. And now they're looking for a $78 versus a $53. And then 2027. One estimate higher for 27. They're looking for 201 up from a $99. So just 2 cent gain there. But again it is very early for 2027. We're not even really thinking about it other than the pre war 2027 when they thought that oil prices would start to rise as supply was more constrained in 2027. But we're now seeing the supply constraints in 2026 thanks to this oil shock. And so we're really seeing the high prices now. So that's just three of them. Three random ones I picked out. There's some more you could do. As I mentioned, there were 33 stocks in this group so you can take a look through them. Some are natural gas plays. So this is only oil. If I looked at the Canadians. Let's see, can I find the Canadians here? Of course I can. If you are clicking on the industries and scrolling down, you know There are over 200 industries listed there. But oil and gas is its own category. We also have international in the, in the oil and gas producer category. So we have it all. We have specialty production and pipelines. Production pipelines, MLB mechanical and equipment. Then we have integrated international, integrated United States, integrated Canadian. Those are big oils. Integrated emerging markets. That would be like probably the ones like down in Colombia. And some of those are probably in the emerging markets category there. Not, not international field services. And then we have all the exploration. So on the Canadian side we have eight entries. Eight entries on the Canadian side and nobody is a number one or number two. There are five number threes, two number fours and a number five. So surprising we're getting some of those number fives because the estimates were being cut ahead of this war. So it has been rough for the earnings side of things in these companies. And then just looking, let me see how many are number. We have no number fives. Now that's interesting. On the US side there's only two number fours. Everyone else is a number three. So we have 31 number threes. That's interesting. But again that's bound to change and we will see rising earnings estimates on a lot of these companies, at least the oil side of things, but we may even see it on natural gas side of things as well. So keep these things in mind while you're looking at these companies. You can't really go by value or trap right now because a lot of these are in a trap. That's why I haven't done that episode in a while because they are trappy and they weren't cheap the last time I did the episode on oil stocks. But they are going to get cheaper if those earnings rise even as the stocks themselves are rising. So I still do like it. Even though they've been on a rally. I would have some oil production exposure in a portfolio with an energy shack like this. We don't see this ever. So buy the companies that are going to benefit from it. Even if though the rest of us might get hit at the pump. These companies are selling their barrels so and now they're in real demand and this is what they are built for. So look at EOG Resources ticker eog, that's the one I just bought for Value Investor Portfolio here at Zach's. Look at Diamondback Energy Ticker F A N G. Look at Magnolia Oil and Gas Ticker M as in Mary G as in George Y M G Y. That's the smallest out of the three I just showed. Sometimes the junior producers can see a bit more of a run than the larger producers when we have these shacks. So take a look at some of the smaller ones and then there's a whole bunch of others that are just mixed in there. But do your homework. Look and see where they're drilling because I had no idea EOG was now doing some drilling in the Middle East. That was a new, new one to me and I follow these companies pretty closely, but I haven't really been in the last year or two given what was happening with the earnings. So things can change quickly. Make sure you're investigating it when you are investing. And as always, I'll be on top of all of these stocks. I haven't looked at the fertilizers yet. We're going to have to cover those. Probably next week we'll take a look at the fertilizers. We haven't covered those in quite a long time here on the podcast. Maybe even back when the Ukraine war was beginning. That's the last time, maybe, but we're going to take a look at that and we've got gold going on. A lot of other things happening in value stocks right now. The banks those have sold off, so could be some more value there. So be sure to subscribe, get us get us on our podcast channel on YouTube at Zack's podcast. Get us on Apple, get us on Spotify. We're on Amazon Music just about anywhere you can get any of these podcasts, audio podcasts. We are there, so get us. Don't miss a single episode and I'll be back next week with some more
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value stocks this material is being provided for informational purposes only and Nothing herein constitutes investment, legal, accounting or tax advice or a recommendation to buy, sell, or hold a security. Do not act or rely upon the information and advice given in this podcast without seeking the services of competent and professional legal, tax or accounting counsel. Publication and distribution of this podcast is not intended to create, and the information contained herein does not constitute an attorney client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, company sectors or markets identified and described were or will be profitable. All information is current as of the date herein and is subject to change without notice. Any views or opinions expressed may not reflect those of Sachs Investment Research as a whole.