Oil giants ExxonMobil (XOM) and Chevron (CVX) have accounted for about a third of the Dow’s point losses this month, with Exxon stock falling in 20 of the past 21 trading sessions. However, Raymond James energy analyst Pavel Molchanov thinks things will soon turn around for the two energy stocks thanks to the falling price of oil.
“We think there is quite a bit of downside to oil,” he said. “And in the context of a falling oil price, it is precisely these kinds of high-quality defensive energy stocks that tend to outperform.”
That means holding on to Exxon and Chevron if you own them, and buying them on any weakness, he added.
Right now, Molchanov said the names are suffering, in part, because of the recent bull market.
“They are simply not in favor in the context of a bull market, where investors generally want something more growth, higher beta, more speculative.”
The compressed spread between Brent and West Texas Intermediate (WTI,) which hasn’t helped Exxon’s and Chevron’s refining businesses, is also a factor, he noted.
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While Molchanov believes there are still opportunities in smaller-cap, higher-beta names that have done well over the past six months, he believes Exxon and Chevron are the place to be if oil prices slide.
“If oil prices do weaken into next year, and … [the] supply-demand analysis we`ve done tells us that, these stocks should do relatively better than most of the smaller, higher-beta energy stocks,” he said.
So how low can oil prices go?
By the end of the year, Molchanov expects WTI to hit the low- to mid-90s, a drop of about 10 percent. By next year, he thinks it could potentially drop into the 70s.
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