Oil Production Cut Extended to March 2018
- By Alberto Abaterusso
An agreement between OPEC and non- OPEC countries led by Russia, which extends the oil production cut period another nine months starting July 1, has been reached according to reuters.com.
With this measure that visualizes cutting oil production by 1.8 million barrels per day, the producer countries aim to fight a global surplus of oil that caused oil prices to drop 50% over the last three years and energy companies' revenue to drop as well.
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The intrinsic value of VLO
Immediately after the deal, West Texas Intermediate (WTI) oil prices dropped below $50 per barrel.
Crude Oil WTI Futures - Jul 17 (CLN7) are trading $49.08 per barrel, up 18 cents or 0.37% from the previous trading day.
A global shrinkage in the oil stockpiles plus a decrease in the export of oil from Saudi Arabia to the U.S. should help oil prices uptrend again, according to Khalid al-Falih, Saudi energy minister, as reported by reuters.com.
As it was for the first part of 2017, when OPEC's cuts in the production of oil helped to drive crude oil back over $50 per barrel and some energy stocks to recover on the stock markets, among others - Marathon Petroleum (NYSE:MPC) and Delek US Holdings Inc. (NYSE:DK) gained 4.16% and 5.23% year to date, as you can see in the chart below.
Source: Google Finance
Recently on these two energy stocks Goldman Sachs has either confirmed a buy rating (Marathon Petroleum) or increased its rating from neutral to buy (Delek US Holdings) foreseeing room for further upside in the market value from the current share prices.
Marathon Petroleum is set by analysts to reach a share price of $62.58 over the next 12 months while Delek US Holdings is set for a share price of $26.20.
Marathon Petroleum is trading at $52.45 per share; Delek US Holdings is trading at $25.33 per share.
I would invest in these two energy stocks. Compared to their peers they are characterized as having the highest market volatility. This means that every increase in the price of crude oil per barrel will be translated into higher expectations by the market on these two companies' revenue, earnings and therefore their market values will surge consequently.
As shown by the pictures below, Delek US Holdings and Marathon Petroleum have - compared to peers Valero Energy (NYSE:VLO) and HollyFrontier (NYSE:HFC) - a higher beta market that has been calculated over the last three years through a multiple regression analysis tool.
Valero Energy
Marathon Petroleum
HollyFrontier
Delek US Holdings
The summaries above show the return on the market and return on WTI coefficients for each of the four stocks analyzed in this article. These coefficients measure the exposure of each of these four energy stocks to changes in the Standard & Poor's 500, taken as a proxy for the stock market and in the Crude Oil WTI Futures. For the analysis weekly changes in the S&P 500, Crude Oil WTI Futures and energy stocks prices have been considered.
The same considerations can be made when investing in other energy stocks since this article covers only a small group.
Disclosure: I have no positions in any stock mentioned in this article.
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This article first appeared on GuruFocus.
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The intrinsic value of VLO
