Oil and Gold Stocks Jump Higher as US Targets Iranian General

Investing

Published: January 3, 2020 10:05 am

Last Updated: January 30, 2020 11:37 am

Just when everybody was confident that 2020 could be a 2019 replay, as a 330-point rise in the Dow Jones industrial average kicked off the year, the U.S. military killed two high-profile commanders of Iran’s secretive Quds Force, the U.S. Defense Department said late Thursday.

Qassim Suleimani, a commander of Iran’s military forces in Iraq, Syria, Lebanon and elsewhere throughout the Middle East, was targeted in a U.S. drone strike. In addition, Abu Mahdi al-Muhandis, said to be the deputy of the militias known as the Popular Mobilization Units and a close adviser to Suleimani, was also killed in the airstrike near Baghdad’s airport, according to Iraqi television reports.

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While the stock market is poised for a bad end to the week, both gold and oil are skyrocketing higher on the global tension. We have noted recently that oil stocks, which lagged the market badly in 2019, and gold stocks could jump back into favor with any sort of geopolitical increase in tension, and the prospect of conflict with Iran is the ultimate tail risk for investors.

Oil Stocks

Recently we highlighted undervalued oil stocks, and these four are incredible values for investors looking to add energy exposure now.

Exxon Mobil

This is America’s largest oil company by market value, but the $300 billion market cap is way down from its glory days and is now only about 15% of Saudi Aramco’s. Exxon Mobil Corp. (NYSE: XOM) is also valued at close to 21 times a mix of expected 2019 and 2020 earnings, with roughly a 5% dividend yield. Up by a paltry 1% in 2019, the consensus price target of $78.36 implies upside of almost 12% from its current $70 share price, but its 52-week trading range of $64.65 to $83.40 shows how challenged it has been. Merrill Lynch is still incredibly positive about Exxon, and the stock is one of the top 2020 picks. The shares closed Thursday at $70.90.

Royal Dutch Shell

The Anglo-Dutch supermajor integrated oil company said last year that it plans to become the world’s largest electricity producer by the early 2030s. The trick, of course, will be to replace a massive oil and gas business by acquiring scalable projects and companies to replace fossil-fuel revenues. Royal Dutch Shell PLC (NYSE: RDS-A) has a hedge, of course: its production in the Permian Basin has risen by 80% this year and it is currently negotiating with privately held Endeavor Energy to acquire another 64,000 barrels a day of production. Sporting a 5.35% dividend, the stock closed Thursday at $59.74.

Occidental Petroleum

Occidental Petroleum Corp. (NYSE: OXY) is the poster child for energy’s bad year. The company’s $40 billion buyout of Anadarko sliced more than 40% from its share price last year. Warren Buffett put up $10 billion to help Oxy get the deal done and, in addition to 100,000 preferred shares with an 8% coupon, he received an option to buy 80 million ordinary shares at $62.50. With the stock now trading at around $42 a share, and a consensus price target of $50.36, the implied upside is around 32%, just over half the upside if shares reach Buffett’s strike price.

Oxy’s capital spending last year was right around $7.5 billion. The company is expected to cut that to $5 billion in 2020, nearly enough entirely to fund the company’s current $3.16 annual dividend. That said, there was a thought after the merger’s closing that perhaps Occidental should have just tried to give Anadarko back to its shareholders. The shares closed Thursday at $42.58.

Parsley Energy

With a market cap of less than $6 billion, Parsley Energy Inc. (NYSE: PE) is considerably smaller than the other oil companies in this list, but it also has the distinction of having added 10% to its market value last year. In October, Parsley announced a $2.27 billion acquisition of Jagged Peak Energy, like Parsley a significant player in the Permian Basin. The deal is expected to close in the first quarter, and Parsley is expected to reduce capital spending by 14% this year while raising production by 10%. At a recent price of $19.17 per share and a consensus price target of $24.26, the implied upside in Parsley’s stock is substantial.