Despite reaping record profits in 2022, the energy sector has been grappling with underperformance against the S&P 500 in 2023. The stabilization of oil and gas prices following Russia’s invasion of Ukraine have made a significant impact, with West Texas Intermediate (WTI) crude oil prices seeing an increase of about 90% in the past three years. Stocks with a high correlation to these oil prices have been generating impressive free cash flows, but this correlation can also prove risky, as evidenced when crude prices nose-dived in 2020.
The stocks highly attuned to WTI crude oil prices, earning them a buy-rating from Bank of America, include Targa Resources Corp., Schlumberger Ltd., Hess Corp., Halliburton Co., ConocoPhillips, EOG Resources Inc., and Baker Hughes Co. These companies, specializing in diverse areas from midstream logistics to oilfield services, have correlations to crude oil prices ranging from 36.1% to 52%. Despite the inherent volatility of the energy sector, these companies continue to show promise, with some demonstrating best-in-class growth and others offering an attractive risk-reward profile.
Oil Stocks with Highest Correlation to Crude Prices
Despite facing a year of record profits in 2022, the energy sector has experienced a sluggish performance in 2023, lagging behind the S&P 500. Although oil and gas prices have stabilized following Russia’s invasion of Ukraine, the West Texas Intermediate (WTI) crude oil prices have seen a steep rise of about 90% over the past three years. This has led to stocks highly correlated with oil prices generating huge free cash flows. However, this high correlation can also be a double-edged sword as seen during the crude price collapse in 2020.
High Correlation Stocks
Among the stocks with the highest correlation to WTI crude oil prices, Bank of America has given a buy rating to seven. These include Targa Resources Corp. (TRGP), Schlumberger Ltd. (SLB), Hess Corp. (HES), Halliburton Co. (HAL), ConocoPhillips (COP), EOG Resources Inc. (EOG), and Baker Hughes Co. (BKR). These stocks have shown a correlation ranging from 52% to 36.1% with WTI crude oil prices.
Performance Overview
Targa Resources, a U.S. midstream logistics company, has shown the highest correlation of 52%. Despite a temporary slowdown in the second quarter, the company’s core businesses have performed well. Schlumberger, one of the world’s leading oilfield services companies, has a 47.3% correlation with crude oil prices. The company’s exposure to international markets is expected to serve it well in the long term.
Hess Corp, a global crude oil and natural gas exploration and production company, has a 46% correlation to crude prices. The company’s properties in Guyana are expected to be a game-changer. Halliburton, a leading U.S. oilfield services company, despite a slight dip in shares this year, is expected to perform well in the long term, particularly in U.S. shale business.
ConocoPhillips, one of the world’s largest independent oil and gas exploration and production companies, has a 39.6% correlation with crude oil prices. The company returned $2.65 billion in cash to its investors in the second quarter. EOG Resources, with a 39% correlation, pays a 2.6% forward dividend, the highest on the list. Baker Hughes, a U.S. oilfield services company, has seen a 22% rise in shares through Aug. 28.
Takeaways
The correlation between these stocks and crude oil prices underscore the inherent volatility and risks in the energy sector. However, the high correlation also presents an opportunity for high free cash flows. Investors should consider these factors when contemplating investments in these stocks. As these companies are expected to generate significant cash flows, they can offer substantial returns to their shareholders. However, caution should be exercised due to the potential risks associated with price fluctuations in the oil market.
