Oil Prices and the Hormuz Swings
The Strait of Hormuz is blockaded again, and crude prices are up again. People check the news each morning to see where prices sit that day. Even so, the broader market keeps hitting new highs, pushed by AI enthusiasm and other drivers.
It has been a very volatile year for oil. Prices spiked above $100 per barrel, fell back to pre-war levels, spiked once more, then came down again. Despite a real supply disruption, prices have not climbed even higher. Part of the reason is timing and part is how the market reads the conflict.
Why Earnings Look Strong This Quarter
The most recent price spike happened during the second quarter, so energy company earnings look good this quarter. These oil companies have gotten smart about capital allocation. With the strong free cash flow they are generating, I expect them to hand much of it back to shareholders through dividends, which is welcome for anyone holding these stocks.
Higher prices do not quickly translate into more oil. It takes a sustained level of prices to push companies to produce more, because there is a long on-ramp before the right capacity gets activated. The Iran negotiations are unpredictable and no one knows how they will end. If the market comes to believe there will be a more permanent supply-demand imbalance, more capacity will likely come on.
From Avoiding Energy to Buying It
For the first 28 years of the firm's history, it never invested in energy. The sector had everything to dislike: cyclicality, boom-bust cycles, high leverage, and speculative capital allocation, where you simply drilled and saw what was down there.
COVID changed that. The entire sector shrank to about 2% of the whole market. Those low prices caught attention, because the entry price of any investment matters mathematically to the returns you can earn. More important, the companies used that period to step back, look at their balance sheets, and use their cash flows to pay down debt. They got smarter about how they ran themselves, focused on shareholder-friendly moves and cleaner balance sheets, and kept that discipline as the sector moved into a much more successful stretch.
Canadian Natural Resources (CNQ)
Canadian Natural Resources, ticker CNQ, is a well-known company in Alberta in the oil sands business. From the air, its fields look like a giant sandbox. It holds more than 30 years of proven reserves in that sand, so it is essentially manufacturing oil. There is no doubt about where the oil is, because you can literally see it, and those reserves are proven. The management team is strong, and the company has raised its dividend 26 years in a row. It is a strong free cash flow business.
There is a longer-term angle too. As conflict with Iran continues, companies like CNQ are building pipelines to the West Coast to reach Asian oil markets. Today that Asian access runs mainly through the Gulf Coast and more regional providers, so the pipeline plan opens a new route worth watching.
Diamondback Energy (FANG)
Diamondback Energy trades under the ticker FANG, a fitting one for the name. It is the most prominent shale player in the Permian Basin, close to Midland, Texas. It has consolidated its footprint well, buying Double Eagle and then making the much larger Endeavor acquisition. It has direct access to the Gulf Coast and exports a large share of its production through already-existing US capacity. Like the others, it returns capital to shareholders through dividends.
