Oil prices have plunged several times in recent years. Each fall has put a hole in the cash flow of oil companies, causing their stock prices to fall. Many have struggled to survive as these deep dives have caused wave after wave of bankruptcy filings.
However, while crude oil crashes have a devastating impact on most companies in the industry, they can benefit others. We asked some of our contributors to the energy market which stocks they think could gain in the long term if oil prices fall again. They came up with original ideas: BP (NYSE: BP), TC Energy (NYSE: TRP), and United Parcel Service (NYSE: UPS). Here’s why they think this trio could come out on top if the rough crashes again.
Prove the call
Reuben Gregg Brewer (BP): Would it be really great for BP if oil prices collapsed again? On the surface, being one of the largest integrated energy majors on Earth, the answer would be a very clear no. In fact, BP’s top and bottom results would suffer just as they did earlier in the year when oil prices fell sharply. But there is a bigger problem at play here.
BP recently announced huge changes. Underlying these changes is the belief that global demand for oil has peaked. The company has cut its dividend by 50% and plans to cut its oil production by 40% over the next decade. But BP intends to dramatically increase its presence in the renewable energy space, with 40% or more of its capital spending budget shifted to non-oil investments. It has already taken notable steps, including the recent $ 1.1 billion purchase of a 50% stake in two US wind projects.
The great victory for BP of a further fall in oil prices will not be financial, it will be strategic. If oil prices start to fall again, investors will be confident that BP is on the right track for the long term.
Sheltered from oil price volatility and towards power
Matt DiLallo (TC Energy): Canadian energy infrastructure giant TC Energy has limited direct exposure to energy marketvolatility. Its business model focuses mainly on operating assets backed by regulated rates and long-term fixed rate contracts. Taken together, these sources support 92% of its current profits and insulate it from price and volume fluctuations. For this reason, another crude oil crash will not reduce its profits too much.
Instead, TC Energy’s earnings are on track to grow at a healthy pace over the next several years. The company is seeing its profits grow at a compound annual rate of 8% until at least 2022. This confirms his plan to increase its dividend – which currently yields 5.2% – from 8% to 10% next year, and from 5% to 7% of the annual rate after 2021. Fueling this plan is a big backlog. scale consisting mainly of gas pipeline projects and an extension of the life of a nuclear power plant.
Meanwhile, the company will likely move further away from the oil market in the future, making it even more immune to its fluctuations. He recently appointed the chairman of his energy and storage segment as his next CEO, suggesting that TC Energy will likely focus on expanding this segment by investing in more renewable energy projects and opportunities. energy storage. As the company plans to slowly shift more investment into the electricity market, another drop in oil prices could accelerate this development as it reduces its near-term opportunities in the fossil fuel sector.
An additional tailwind for an already formidable company
Daniel Foelber (United Parcel Service): UPS shares are up more than 40% year-to-date, outperforming the market’s 2% gain. Its success is mostly attributed to its business-to-consumer (B2C) segment in the United States, which increased its sales by 65% year over year in the second quarter of 2020. Although B2C sales have traditionally had negative results. margins lower than those of companies (B2B), its operating margin in the United States fell from 11% to only 9.3%. This slight decrease, coupled with higher revenues, resulted in an overall profit increase for UPS in the second quarter. UPS’s ability to grow profits during what was considered one of the most difficult quarters for the industrial sector in recent memory is impressive, but it is not without a key enabling factor out of control. of the company: the drop in fuel prices.
As one of the largest transportation inventories in the United States, UPS consumes significant amounts of gasoline, diesel and jet fuel to power its fleet of 267 planes, 5,900 vehicles and 22,000 trailers.
So far this year, fuel prices have been the only operating expense for UPS down from 2019. In the first half of 2019, UPS spent $ 1.63 billion on fuel, or $ 12 billion. 5% of its total operating expenses. For the same period this year, it spent 22.6% less, or $ 1.26 billion, or just 8.8% of its operating expenses.
Savings of $ 367 million are not a small number, and they contributed significantly to the company’s first-half net profit of $ 2.73 billion. If crude oil stays low or falls further, UPS should continue to benefit from lower fuel prices. In the meantime, UPS will pay you for waiting with a safe and reliable 2.5% dividend yield.