Which Oil Companies Stand to Benefit Most From a Trump Presidency?

With the US Presidential election more than a week behind us and, with Republicans controlling the Senate and House as well as the White House, the so-called “Trump trade” is well underway. One might expect that a large part of that would be a bullish move in US oil stocks but, while that has happened to some extent, the exuberance of the market has been tempered by the fact that crude has been mired below $70, close to its 52-week lows.

The main reason for that seems to be the perception of relative weakness in the Chinese economy, although, as I have said over the last few weeks, the pro-Russia and “drill baby, drill” policy proposals from Donald Trump during the campaign suggest quite significant increases in the supply of crude, which have at least put a ceiling on WTI.

From a stock investor’s perspective, though, the price of oil is not the biggest concern right now. As long-term holders of oil and energy stocks know only too well, the commodity price fluctuates but the inevitable relationship between price, supply, and demand ensures that, over time, it always returns to the mean. So, given that, and given the fact that pretty much all US oil and gas industry stocks have risen since the election, is there a viable strategy for those that are still sitting on cash?

There is, but the key is to be selective in terms of which stocks to buy.

As we know after his previous four year term, what Trump says and what he does are often only loosely related at best, but stories of him appointing an “Energy Czar”, tasked with slashing regulations and ramping up oil and gas drilling, suggests that “drill baby, drill” may make the shift from slogan to actual policy. That is the argument for buying US oil stocks, but not all of them will benefit equally when those changes start to take place.

The White House can only increase drilling and output in the US, so American companies with significant reserves in America will do better than those with a more geographically diverse portfolio. In fact, one could argue that the combination of increased US supply and tariffs that will raise the specter of retaliatory restrictions on American businesses overseas will make the next four years extremely challenging for those with extensive overseas holdings.

The obvious first task for investors, therefore, is to look at which companies are more focused on US reserves than foreign. The latest survey of US reserves was released in August, and the numbers might surprise some people.

Exxon Mobil (XOM) and Chevron (CVX) are the two largest US oil companies by quite a large margin when it comes to market cap, but the list of American companies’ US reserves is headed by two firms only a fraction of the size of the big two, Conoco Phillips (COP), and EOG Resources (EOG). And yet, a comparative chart of those stocks shows that while EOG jumped on their November 8^th earnings release, making it the best performer, the other three have all roughly matched each other in terms of post-election performance, with COP (orange line) actually performing the worst of the four on a comparative basis.

There are reasons for that, of course. Most notably, COP has seen big drops, certainly bigger than most of their rivals, in revenue and EPS over the last year. That is a worry in some ways, but the whole point here is that Conoco is positioned to see a big jump in production over the next few years, which will close the gap between them and their competitors. The same can be said of EOG. They too have disappointed, but again, the next four years are an opportunity to turn that around, so a trailing EPS of 10.8 looks more like an opportunity than a warning.

History suggests that the direction of stocks, including those in the energy sector, will be driven by something other than White House policy during the coming administration: the kind of global recovery that resulted in President Obama presiding over some of the biggest market gains ever seen under one President, for example. Or, on the flip side, the emergence of a global recession that resulted in the S&P 500 losing over 35% during George W Bush’s 8 years in office.

However, that kind of black swan event cannot be predicted. What can be anticipated with some confidence, deregulation and output encouragement from a Trump administration, clearly indicate that the best performers in the energy sector will be the companies with the biggest US reserves. That makes COP and EOG, one and two in that regard, the best picks for playing the Trump trade over the long term.