When you see prices rising or falling at the gas pump, you might wonder how those market shifts are playing out with oil stocks on Wall Street.
Although it’s possible for investors to brave commodities markets and invest in oil directly, buying and trading oil stocks can be more approachable for everyday investors. There are several types of oil companies whose stock is publicly traded — each with its own set of potential upsides and drawbacks.
There is quite a bit you should know before you dive in. If you want to invest in oil stocks right away, here is a quick guide that can help.
Getting started with Oil Stocks - Quick Guide
- Research your oil stocks – Shortlist the best oil stocks for 2023 using strict criteria.
- Define your strategy – trading lets you speculate on the price movement; dealing lets you take direct ownership of the stocks.
- Take your position – create an account with us to buy and trade in oil stocks.
What Is an Oil Stock?
Oil stocks are shares of companies involved in the extraction and production of petroleum. The oil and gas industry comprises upstream companies that explore and produce energy sources, midstream pipeline companies that transport and store oil and gas, and downstream companies that refine the energy sources into finished products.
Additionally, there are companies that provide oil field drilling equipment and services. Some also manufacture and maintain equipment used in production.
It’s important to remember that oil stocks, like the companies they represent, will likely do better if oil prices are high. And their long-term outlook is deeply enmeshed with geopolitical, economic, and regulatory factors beyond any one company’s control.
Oil’s recent price increases could make for some intriguing opportunities, but investors should also consider ongoing technological changes that could reduce demand.
Types of Oil Stocks
Most oil stocks fall into one of a few major categories. There are companies that find and pump oil, companies that provide oilfield services, companies that refine oil and integrated companies that do it all. In addition, there are some specialized companies that own and operate oil pipelines.
1. Exploration and production
Companies that look and drill for oil are among the most volatile stocks in the oil space, Jones says, and their prices are very responsive to short-term trends. This can be a benefit if you buy at the right time or if the company, you’re investing in makes a significant discovery of natural resources.
But shares in oil producers can also be vulnerable to downturns in the oil market that affect their ability to make a profit on what they pull out of the ground.
2. Oilfield services
These are companies that make equipment used in the massively complex process of drilling and extracting oil. This includes drilling gear, testing and safety tools, and other heavy-duty components.
Oilfield services companies can also see big swings in profitability driven by oil prices. If oil prices go down, drilling becomes less profitable, and producers are less likely to spend money on equipment and services. If the price goes up, producers may spend more on oilfield services as they try to reach reserves that are more difficult to extract.
3. Refining
Refining companies operate facilities that turn crude oil into products such as gasoline. These companies can do quite well in favorable market conditions. Since they have to buy oil well in advance of the time they receive, refine and sell it, they can make good returns amid rising prices.
However, when prices go down, that dynamic is reversed. Refiners can wind up charging less for their products than they cost to make.
4. Integrated oil companies
Integrated oil companies have some aspects of production, services, and refining all in-house. This can mean that their risks are spread out more broadly than companies that specialize in one aspect of the oil industry. Nonetheless, their prospects can vary considerably because of the price of oil.
5. Master limited partnerships
Master limited partnerships, or MLPs, are publicly traded companies that own pieces of energy infrastructure such as pipelines. These tend to pay high dividends, Jones says, and they are popular with retail investors. Their prices can be volatile, though.
How to find the best Oil stocks?
Below are some of the key considerations to consider when evaluating the major oil and gas stocks:
Commodity prices: the price of oil and gas dictates what these companies can sell their product for, which goes toward deciding on the margin it makes on each barrel. Production: the amount of oil and gas a company produces, which is often measured in barrels of oil equivalent. Dividend and buybacks: many investors flock to oil and gas companies because they are known for generous pay-outs compared to many industries, while some also reward investors with additional share buybacks.
Costs: the other driver of margins is the cost of extracting the stuff out of the ground. Low costs are key, especially when prices are low, as this can be the deciding factor behind whether a company is profitable or not during a downturn. Cash flow: oil and gas companies have a lot to pay for. They must maintain their huge operations, invest in new projects and exploration, and keep shareholders happy by paying dividends. Generating cash flow is how they must pay for all of this if they are to avoid using debt. Resources and reserves: the amount of oil and gas they have in resources and reserves can play a large part in deciding the value of a company. This is the same as taking the value of the excess stock of a retailer into account. Exploration and prospects: resources and reserves are found by exploring new prospective areas for oil and gas. Exploration is risky and expensive and often doesn’t pay off, but it is essential for the industry and a solid track record in delivering new projects is key.
It’s important to remember that oil stocks, like the companies they represent, will likely do better if oil prices are high. And their long-term outlook is deeply enmeshed with geopolitical, economic and regulatory factors beyond any one company’s control.
Top Oil Stocks for April 2024
Here are the top five oil stocks with the best value, fastest growth, and most momentum.
There are dozens of oil stocks. They run the gamut from pure-play E&Ps, midstream companies, service providers, and refiners to integrated oil majors that do a little bit of everything. That gives investors lots of options.
ExxonMobil
ExxonMobil was founded in 1859 and has evolved from a kerosene producer in the US into a global behemoth that is now predominantly focused on upstream production. Producing oil and gas, as well as liquified natural gas (LNG), contributed 83% of net income in 2019 before central eliminations.
ExxonMobil has proven to be a reliable dividend payer in recent years, having grown at an average annual rate of 6.2% over the last 37 years, and it has pledged to maintain payouts during the coronavirus crisis.
While the company may have cut dividends in 2020, it has made a great recovery in 2021. As the chart below shows, ExxonMobil has been following a steady upward trend since the end of 2020. This recovery is due to an improvement in oil and natural gas prices as well as higher chemical margins. There has also been a recovery in the demand of the company’s products as global economies start to kick back into gear following the Covid-19 pandemic.
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Royal Dutch Shell
Royal Dutch Shell (RDS) is the largest oil and gas company listed on the London Stock Exchange. Its origins trace back to importing from the Far East in 1833, but its venture into oil and gas began in the 1880s. Today, it has four main businesses including an upstream and a downstream division, which sit alongside its more distinguishing segments focused on integrated gas and alternative, cleaner energy.
Recognized internationally due to its familiar red and yellow logo, Shell also has one of the strongest brands on this list. With the company’s roots dating back as far as the 1830s, Shell is one of the most experienced companies in the oil industry, and it’s reasonable to assume it will retain its leadership position in Europe.
Additionally, Shell is one of the oil stocks with the best value. It has a low P/E ratio of 5.32, as well as a 3.88% dividend yield. Cash on hand equates to $38.97 billion, a reasonably large sum for a stock valued at roughly $182.92 billion.
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Chevron
Chevron is another big US-listed oil and gas major. It began life as the Pacific Coast Oil Co when it was formed in 1879. Today, the company operates a more traditional model of upstream and downstream, which equally contributed toward earnings in 2019.
The company has consistently increased its dividend for 32 consecutive years and has committed to paying investors during the coronavirus crisis, marking a huge difference in attitude between US oil majors and their European counterparts. However, this is partly due to the fact they entered a troublesome 2020 with better debt-to-equity ratios than most of their international peers.
After a tough 2020, Chevron has pulled things back, posting reported earnings of $3.1 billion for the second quarter of 2021. This is a vast improvement over the $8.3 billion loss reported in quarter two (Q2) of 2020.
Like Exxon, Chevron suffered from a downstream margin and volume effects from the pandemic, as well as the aftermath of a winter storm in the US that battered the south of the country in February. Its recovery has come thanks to higher oil prices on the back of economies rebuilding themselves after Covid-19.
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Total
Total is a French giant that was born in 1924. Today, it operates in over 130 countries, and it believes its geographical spread is a differentiator for the business. Currently, Europe, the Middle East, and Africa are key hubs for the company, but it recognizes areas like the Americas and Asia will play a bigger role in the future.
Total has pledged to become carbon neutral by 2050 and has been making large investments into renewable energy, such as a recent investment in a UK North Sea wind farm.
In 2019, Total’s downstream division generated nearly half of all revenues before eliminations, while its trading division contributed about one-fifth. Its upstream division only accounted for 16%, while its integrated gas and renewable energy unit contributed the rest. However, upstream contributed the most in earnings, followed by downstream.
In terms of its dividend, Total currently sits in between its European and US counterparts. It has maintained pay-outs during the crisis so far, but also committed to a more aggressive drive toward cleaner energy. It has, however, stopped buying back shares.
Total has shown significant growth recently, having a 59% increase in earnings before interest, tax, depreciation, and amortization (EBITDA). This is thanks to global economies recovering from their 2020 coronavirus-induced slump, as well as the fact that it’s diversified into renewable energy and away from hydrocarbon-centered activities.
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BP
BP, the other major London-listed oil and gas behemoth, operates in nearly 80 countries worldwide and produces around 3.7 million barrels per day as of 2018.
Currently, it’s split into three key areas that operate in 87 countries worldwide: upstream, downstream, and a third one representing its 19.75% stake in Russian giant Rosneft. Downstream was the biggest contributor to both revenue and earnings last year.
BP reported a decrease in energy consumption of 4.5% in 2020. This is the largest decline since 1945 and did affect the company.
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Note: Experienced financial analysts selected the oil stocks above, but they may not be right for your portfolio. Before you purchase any of these stocks, do plenty of research to ensure they align with your financial goals and risk tolerance.
Should you Invest in Oil Stocks?
Buying oil stocks isn’t for everyone. Here are some pros and cons of oil stocks.
Pros:
Dividends: Oil stocks tend to have high yields for their investors. In flush times, companies across the industry will distribute a good proportion of their profits to shareholders, rewarding those who stuck around when times were tougher. Portfolio balance: The performance of oil stocks and the energy sector may not correlate with the broader market (best represented by the USA 500 index), meaning holdings in the energy sector could buoy losses from those elsewhere.
Cons:
Geopolitics: Energy companies operate all around the world, and that means they rely on the sometimes-fragile relations between countries where oil is produced, countries that control distribution routes, and countries where consumers live. For example, the Russian invasion of Ukraine has led to upheaval in the oil market. While this has led to higher prices, and some gains for oil companies, it also has the potential to reorient the global energy situation in ways that no one firm can control or even predict. Volatility: Oil stocks can swing dramatically along with the market for oil. If you’re buying oil stocks, you should be comfortable with the possibility that your investments will lose value. Environment and regulation: Nations around the world are working to transition away from fossil fuels in the hopes of blunting the effects of climate change. Though this is a slow process, over time it could mean a lot less oil is produced and sold. And in the shorter term, demand for equities in fossil fuel companies could potentially be affected by moves toward sustainable investing, both by individuals and institutions such as pension funds.
How to Invest in Oil Stocks
There are two routes to investing in oil stocks: speculating on their prices using CFDs or buying the assets in the hope they increase in value.
Trading oil stocks using CFDs
A CFD is a contract in which you agree to exchange the difference in the price of an asset from when you first open your position to when you close it. You are speculating on the price of the market rather than taking ownership of the stocks. If you open a long position and the stock or ETF does increase in value, you’ll make a profit, but if it falls in price, you’ll make a loss – the opposite is true for a short position.
Buying oil stocks and ETFs
This means that you take ownership of a portion of the company or fund outright, with the intention of holding it with a brokerage and profiting if it increases in value.
Oil exchanged-traded funds (ETFs) allow you to invest in an entire subsector of the oil industry at once as opposed to any single oil company. ETFs are baskets of stocks that are traded much like ordinary stocks.
Get Started with CAPEX.com
- Choose which type of account you want to use. Your first concern should be your risk appetite and time horizon. If you want to buy and hold oil stocks, open an investing account. If you want to speculate on price movements (including falling prices) with zero commission and leverage, open a CFD trading account.
- Create an account. Regardless of your chosen account, you need to register and complete the KYC process to verify your identity.
- Fund your account with fiat money. Before buying and trading any gold stock, you need to fund your exchange account with U.S. dollars, Euros, or other currencies.
- Select your stocks. When selecting oil stocks, look for a strong financial profile, low cost of operations and diversification. Alternatively, investors can buy shares in oil-related exchange-traded funds (ETFs).
- Place a buy order for your chosen stock. Follow the steps required by the trading platform to submit and complete a buy order.
When trading stocks, the CFDs (contracts for difference) are stored in your account and are more liquid than the underlying asset. However, you should be aware that CFD trading is fast-moving and requires close monitoring. As a result, traders should be aware of the significant risks when trading CFDs. There are liquidity risks and margins you need to maintain; if you cannot cover reductions in values, your provider may close your position, and you'll have to meet the loss no matter what subsequently happens to the underlying asset.
With CAPEX, you can trade CFDs on +2.000 stocks and invest in +5.000 stocks and ETFs with ownership.
Free resources
Before you start investing and trading in oil stocks, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for stock investors who are looking to make a transition to leveraged trading.