Why Ovintiv, Devon Energy and Diamondback Energy have rallied together today

What happened

US shale producer stocks Ovintiv (NYSE: OVV), Devon Energy (NYSE:DVN)and Diamondback Energy (NASDAQ: FANG) rebounded strongly today, climbing 10.8%, 5.6% and 5.8%, respectively, as of 2:52 p.m. ET.

Since the Federal Reserve raised interest rates by 75 basis points in mid-June, the high-flying energy sector has crashed, with many names down around 25% or more. in so little time. However, with their stocks now at very low prices based on current oil price levels, investors could jump back into those names.

Additionally, bullish news from both the demand and supply side sent oil prices bouncing higher today. In company-specific news, Ovintiv sold a large asset today that will help it deleverage its balance sheet. This could be the reason why the stock is moving higher than the others.

So what

Amid its faltering economy and various COVID-19 outbreaks, the Chinese government has accelerated the sale of $220 billion in bonds to local governments this year to boost the economy. Oil prices have surged in recent months even as many major Chinese cities were in lockdown and the economy stalled. While not aimed specifically at fossil fuels, better economic activity is good for energy demand, so this announcement last night is undoubtedly a boost for energy names today.

Meanwhile, some supply issues remain. For example, a Russian court just ordered a 30-day shutdown at a crude export terminal due to pollution violations. The unrest in Libya has also reduced production in that country. Meanwhile, as crude oil inventories rose in the United States last week, it was because refiners cut production for servicing, not because of falling demand. The Energy Information Administration also showed gasoline inventories fell more than expected and commercial oil inventories are about 10% lower than normal levels for this time of year.

When you combine China’s stimulus and supply concerns with the recent drop in oil prices over the past three weeks, it’s no wonder these stocks are rebounding today. Ovintiv, Devon and Diamondback are pure-play producers and therefore price takers of oil and natural gas prices, with their assets based largely in the US shale basins.

In terms of company-specific news, Ovintiv announced that it has reached agreements to sell a portion of its Bakken and Uinta assets to private counterparties for $250 million. As a result, Ovintiv will strengthen its balance sheet, allowing it to return more cash to shareholders more quickly. Prior to the deal, Ovintiv had planned to return 50% of its free cash flow to shareholders after October 1; however, with this asset sale, increased shareholder returns will occur this quarter.

Now what

Are oil stocks heading for a big rebound, or is this rebound part of a fresh drop? Of course, each of these companies looks pretty cheap at these levels, as each stock mentioned above is trading at a mid-single-digit multiple of next year’s earnings. That means high dividends and accretive stock buybacks today.

However, remember that oil stocks generally follow oil prices, which have been very volatile this year, both up and down. As I wrote recently, perhaps investors should keep their exposure to energy stocks fixed as a percentage of a diversified portfolio, perhaps adding dips and selling after big gains. Since oil prices have such an effect on inflation and the overall economy, energy stocks can add much-needed diversification to non-energy stocks in your portfolio.

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Billy Duberstein has positions in Devon Energy and has the following options: July 2022 short-term sale of $45 on Devon Energy. Its clients may hold shares of the companies mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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