Those days are over. In July, Shell raised its dividend and initiated a $2 billion share repurchase plan. Now, excess cash sitting on the books is viewed as a drag on performance. It is that dynamic that creates the investment opportunity that I alluded to above. There will be a lot of oil-producing assets coming up for sale soon. Two years ago, French oil giant TotalEnergies (NYSE: TTE) announced that it would divest $5 billion in oil exploration and production (E&P) assets to pivot away from carbon-based fuel sources. Since then, several other energy and utility companies have followed suit. In an effort to drive up their environmental, social, and governance (ESG) scores, they are dumping oil assets as fast as they can. That's good news for the buyers of those assets. As with all goods, when the number of sellers outweighs the number of buyers, prices go down. That means Chevron, Exxon Mobil, and Royal Dutch Shell will be able to expand their oil-producing portfolios while increasing their average operating margins at the same time. With demand for oil rising at the same time, the net result should be a surge in profits for those companies. Supersize Me The easiest way to play this expected surge in oil company profits is to buy shares of the SPDR S&P Oil & Gas Exploration and Production ETF (XOP). Although XOP has more than doubled in value during the past year, it is still well below its peak price three years ago. However, XOP may not fully participate in the profit surge I am expecting over the next three years. The fund's biggest positions are in small to medium-sized oil producers that will not be able to bid against the giants for the assets hitting the market. For that reason, the Energy Select Sector SPDR Fund (XLE) may be a better choice. XLE's top two holdings, Exxon Mobil and Chevron, comprise 43% of the fund's total assets. This fund is cheap. The weighted average earnings per share (EPS) growth rate of its portfolio is 13.4%, while its forward price-to-earnings ratio (FPER) of 15.8 is roughly a third less than the same multiple for the S&P 500 Index. According to my analysis, XLE could appreciate 20% or more by the end of next year. That's a decent return, but I know of a way to quintuple that return to more than 100% over the same span using a seldom-used but simple trading strategy. I am using that same technique for many of the trades that I am making in my new premium advisory service, Personal Finance Pro. To find out more about it, CLICK HERE. |
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