Crude oil prices have been busy this year, rallying from ~$70 at the start, to a high of $88 in early April. Prices have since fallen back to $78 today, where they seem to have found a balance.
However, with the US economy remaining extremely robust, and structural dynamics limiting excess oil production, I believe there is a good chance we will have another leg higher in oil prices coming soon.
I am watching this tight consolidation in the price action of crude oil between $77.90 and $79.60. I think a break in either direction should be decisive, and I lean towards a break higher.
In my search for stocks that should benefit from a breakout in the price of oil Marathon Petroleum MPC and Ecopetrol EC standout as they enjoy top Zacks Ranks and discount valuations.
Image Source: TradingView
Crude Oil Structural Bullish Dynamics
As I mentioned, there are long-term constraints in the crude oil market currently that I believe could keep the price of oil elevated in the coming years.
Of course, the global oil market is vast and extremely complex, but the primary driving forces can be simplified.
Because it is a commodity, supply and demand are the primary forces affecting the market. Supply is controlled mostly by the amount of oil being pulled from the ground, and demand by the strength of the economy.
Now we know the economy is strong and thus so is demand, but what about supply?
Supply is quite constrained and is likely to remain that way, because of two main factors, politics, and business.
Today, it is very politically unpopular to promote infrastructure investments in the oil and gas sector because of climate change and sustainable energy prioritization. Additionally, many major oil firms were hurt badly during the last oil boom, where overinvestment left many producers undercapitalized, and many went bankrupt.
Because of that they have limited new developments.
These two things have dramatically limited new advances in oil and gas infrastructure, and thus severely limited the industry’s ability to bring new supply to the market.
While this will likely cause the price of crude to rise over the long-term, which is not favorable to consumers, it is most definitely favorable to the oil companies as their profits will rise along with the price of oil.
Marathon Petroleum
Marathon Petroleum MPC is one of the largest independent petroleum refining, marketing, and midstream companies in the United States. Headquartered in Findlay, Ohio, Marathon Petroleum operates an extensive network of assets, including 13 refineries with a combined processing capacity of over 3 million barrels per day. This makes it the largest refinery operator in the country.
Analysts have near unanimously raised earnings estimates across timeframes for Marathon Petroleum, giving it a Zacks Rank #1 (Strong Buy) rating.
FY24 earnings have jumped by 36% in the last two months and FY25 by 19%.
Image Source: Zacks Investment Research
Marathon Petroleum stock has also been forming a compelling technical pattern. Over the last two months, this bullish descending wedge has grown tighter and tighter, and appears to be on the cusp of a major breakout.
If MPC can trade above the $179 level, it would signal a technical breakout.
Image Source: TradingView
Marathon Petroleum is trading at a one year forward earnings multiple of 9x, which is in line with the industry average, and below its 10-year median of 11.5x.
Additionally, the stock pays a dividend yield of 1.9% and has raised the payment by an average of 9.3% annually over the last five years.
Finally, and further demonstrating its commitment to shareholders, Marathon has been a chronic buyer of its own shares. They have bought back so many shares in the last five years that the shares outstanding have halved in that time.
Ecopetrol
Ecopetrol EC is Colombia’s largest integrated oil and gas company and one of the leading petroleum companies in Latin America. Headquartered in Bogotá, Ecopetrol operates across the entire oil and gas value chain, including exploration, production, refining, transportation, and marketing of crude oil and natural gas, as well as petrochemicals.
Reflecting a number of upgrades to its earnings estimates, Ecopetrol boasts a Zacks Rank #2 (Buy) rating.
FY24 earnings have climbed by 9% and FY25 by 21% over the last two months. Especially impressive is that EC is expecting YoY EPS growth in both FY24 and FY25, which is rare in the industry as the high prices and profits of past years throw off the growth rates.
Image Source: Zacks Investment Research
One unique and very appealing aspect of investing in Ecopetrol is its massive dividend yield.
The diversified oil giant has a 17.9% yield and has raised the dividend payout by 27.1% annually over the last five years.
Ecopetrol is currently trading at a one year forward earnings multiple of 4.8x, which is just above the industry average and well below its 10-year median of 10.5x.
Image Source: Zacks Investment Research
Bottom Line
For investors looking to add exposure to the oil and gas sector, Ecopetrol and Marathon Petroleum both make for compelling considerations.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Ecopetrol S.A. (EC) : Free Stock Analysis Report
Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report
Source Agencies
