Analysts say there is still more pain ahead for energy stocks, after Exxon Mobil and Chevron posted dismal quarterly results.
“There’s no question that oil is still stuck in this long-term bear market,” John LaForge, head of real asset strategy at Wells Fargo Investment Institute, told CNBC’s “Power Lunch.” He explained that commodities “tend to run these long price cycles” and that these “bear super cycles for commodities last on average 20 years.”
LaForge said that 2016 is just year five of this potentially 20-year bear market.
“What you get at this point in the cycle is a lot of sideways price action, where oil is trying to find what’s the right level. That level is probably $30 to $60 and surprisingly, you might be looking at $30 to $60 for the next decade and it’s going to keep bouncing back and forth,” LaForge said Friday.
The pressures of a low commodity price environment were reflected in the earnings releases of major oil companies on Friday.
Exxon Mobil reported that its quarterly profit fell nearly 60 percent year over year amid a challenging environment of low commodity prices and weak refining margins. Meanwhile, Chevron saw a loss of $1.5 billion during the second quarter, compared with a profit of $571 million in the year-earlier period.
Of the two companies, experts interviewed by “Power Lunch” agreed that Chevron is the better long-term investment. Although both companies reported weak quarterly results, “the outlook is more positive for Chevron,” said Paul Sankey, managing director and senior oil and gas analyst at Wolfe Research.
While Chevron may be the better investment going forward, Sam Margolin, director and oil analyst at Cowen and Co., said Exxon’s year-to-date performance can be partially attributed to investors chasing dividend yields.
“There’s a sense that Exxon is going to be using this period of weakness to strengthen themselves for the long term. I think a lot of investors expect some sort of acquisition,” Margolin said Friday.
Sankey said, however, that with oil prices below $50 a barrel, it becomes more and more difficult for all of these companies to preserve their dividends as they accumulate debt at a rapid pace.
“They’re not even close to covering their dividend in this quarterly result and I think [both Exxon and Chevron] saying, approximately, that they need $50 plus to get back to what they call dividend sustainability cash balance, which is that their cash flow covers their [capital expenditure] and dividend,” he said.