By Jeff Reeves, MarketWatch
Though we’re barely more than a quarter of the way through 2019, we’ve already seen a few big investing surprises.
On the upside, the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.24% is up a stellar 15% in the last three months after a rocky December caused many market observers to wonder whether the bull market was finally on its last legs. And on the downside, the highly anticipated IPO of ride-sharing service Lyft Inc. /zigman2/quotes/208999293/composite LYFT +2.86% is trading well below its offer price of $72.
Another surprise has been the resilience of the energy sector and steadily increasing crude oil prices. After starting the year around $43 a barrel, oil has jumped roughly 40% to the mid $60s per barrel — and the flagship Energy Select Sector SPDR Fund /zigman2/quotes/206420077/composite XLE -0.62% has jumped almost 20% in the same period as a result.
And to hear some say it, the party is just getting started. Analysts at JPMorgan just told Barron’s that if oil can hold the line at $60 in the coming months, the sector can really break out.
If you’re looking to play the current rally for crude, you can always go with broad and liquid ETFs like the Energy Select Sector SPDR Fund, which boasts about $14 billion in total assets and is the No. 1 energy sector ETF by market value. But different slices of the energy sector offer different risks and rewards if you want to get more tactical with your trades.
Here are three ways to play the rally in oil right now, based on your risk tolerance:
In perhaps one of the more aggressive ways to play the oil patch, firms involved with hydraulic fracturing for shale oil and gas were hard hit at the end of 2018 by falling energy prices. After all, the appeal of fracking is that these companies access oil that is a bit pricier and harder to extract, but amazingly abundant in the continental U.S. When oil is cheap, the cost structure just isn’t as attractive and the incentive to pump dries up.
At the end of 2018, as oil approached $40 a barrel, fracker PDC Energy Inc. /zigman2/quotes/202777853/composite PDCE -0.24% plunged almost 39% in three months. Related service stocks were equally hard hit; specialty sand and chemicals provider U.S. Silica Holdings /zigman2/quotes/206361964/composite SLCA +0.77% skidded about 43% in the last three months of 2018.
Now, both have come roaring back. Year-to-date returns for PDC Energy are nearly 50%, and U.S. Silica stock has tacked on an amazing 70% or so since Jan. 1.
These smaller fracking-specific investments are admittedly much higher risk. They don’t have the deep pockets of the major oil companies, and even with technological advancements they can simply wind up on the wrong side of a math equation when production costs are too high and oil is too cheap. However, both PDC Energy and U.S. Silica are expecting a massive swing back to profitability this year on higher oil prices, and investors who are comfortable with volatility may want to hang on and enjoy the ride.
Major oil companies
Of course, while the smaller and more agile small-cap frackers are the quickest to ramp up production, don’t think the majors have been left out altogether. Big Oil giant Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM +0.09% has surged 20% year-to-date to significantly outperform the broader stock market on the heels of a big earnings beat in February.
What’s more, pessimistic investors continue to lowball Exxon stock; shares have a forward price-to-earnings of about 15 even after this run, while the broader S&P 500 has a forward P/E of almost 18. Exxon offers a decent dividend of around 4% to further sweeten the pot. With unrivaled scale that threw off $16 billion in free cash flow last year and a war chest of $3 billion in the bank, neither this company nor its dividend are in danger anytime soon. And after a few years of poor performance and pessimism, now may be a decent time to consider this stock if you’re confident higher oil prices will stick.