• A terrorist attack on Saudi Arabian oil fields pushes oil prices higher.
• Total SA (TOT) moves from Buy to Strong Buy.
Oil prices and shares of oil-related stocks surged this morning after a terrorist attack on Saudi Arabian oil fields shut down about half of Saudi Arabia’s daily oil output, accounting for approximately 5% of global daily output. Expect near-term volatility and trading opportunities.
Total S.A. (TOT – yield 5.8%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Total is the second-largest private global liquified natural gas (LNG) player, with a worldwide market share of 10%. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The market expects Total’s EPS to fall 10.9% in 2019, then to rise 22.0% in 2020. The current P/E is 11.5. The company maintains a consistently low debt ratio.I’m moving TOT from Buy to a Strong Buy recommendation. TOT is rising alongside a rebound in the broader market and investors’ recent embrace of value stocks, additionally spurred on by oil price increases stemming from the September terrorist attack that has temporarily curtailed 50% of Saudi Arabian oil production. Depending on the market’s level of enthusiasm, TOT could rise as high as 58 this year before resting again. Buy TOT now.
More on oil prices…
If you’re not normally a trader, and wondering if you should sell your energy stocks to take advantage of this week’s price strength, I encourage you to simply hold your stocks (presuming, of course, that you own shares of profitable and growing companies). That’s because most energy stocks that I follow are quite undervalued, and recently began a period of upward momentum as the broader market is shifting away from the growth investing style toward the value investing style. So even if Saudi Arabian oil production comes completely back online by tomorrow, I would still expect energy stocks to rise through year end.
Chemical stocks often rise along with oil stocks, and I would therefore treat those stocks in an identical manner.
If oil prices remain elevated, analysts will eventually lower earnings estimates for airline stocks, because the airlines will see their costs rise. While I would certainly not sell shares of Southwest Airlines (LUV) or Alaska Air Group (ALK) right now, primarily because both stocks just broke free from recent trading ranges, I recommend that you pay attention to near-term oil prices. If you are a trader, or you were planning to sell some stocks in the near-term with which to fund other expenses, be ready to sell your airline stocks if share price weakness emerges.
Other transportation companies could more easily pass increased fuel prices on to customers, such as shipping and trucking companies. The folks who hire the shipping and trucking companies to transport their televisions and clothing and food will either pass the higher energy costs on to the end-user (you!) or they will absorb the higher costs, thus delivering lower profits in the current quarter.
If oil prices remain elevated for several weeks or months, that will eventually be reflected in a rising Consumer Price Index, a measure of inflation. Oftentimes, rising inflation leads to rising interest rates. (I’m not saying that today’s spike in oil prices will last for several weeks or months. I have no idea. I’m just drawing parallels for those of you who are wondering, “What can happen when oil prices shoot upward?”)
Send me an email if you have any questions that you think I can answer, but I promise you, I cannot guess how long Saudi oil production will be affected nor how high oil prices might rise.