The COVID-19 meltdown has ushered in a harsh “new normal” for oil-exposed ASX stocks. But at least one top broker believes this embattled group is among the best placed to outperform during the COVID recovery phase.
But make no mistake. The longer-term outlook for oil is not looking good as the world is rapidly moving towards electric and hybrid vehicles.
Coronavirus restrictions have only exacerbated the decline as demand for the commodity plummeted.
Expansion phase to lift ASX oil stocks
However, there might be a shorter-term opportunity here. Macquarie Group Ltd (ASX: MQG) pointed out that the US cycle is in “expansion” mode, following China’s lead.
This “expansion” refers to the economic cycle, which is supported by record levels of stimulus. Even if US President Trump loses the election, the US is still likely to get more fiscal support under Joe Biden.
“The latest data on the OECD Leading Indicator (OECD LEI) shows the US progressed to the Expansion phase of the cycle in September,” said the broker.
“ASX stocks tend to rise in Expansions, with cyclicals and value outperforming.”
Stars aligning for the short to medium-term
ASX energy stocks fit nicely in the cyclical and value territories. Oil tends to be cyclical as it’s linked to economic activity.
Meanwhile, the plunge in the Woodside Petroleum Limited (ASX: WPL) share price, Santos Ltd (ASX: STO) share price and Oil Search Limited (ASX: OSH) share price put the sector firmly in the value camp.
As the world recovers from the COVID crisis, oil demand will surge as people start traveling and moving around a lot more freely.
Never mind that oil is in a long-term decline. It can enjoy bouts of exuberance even while on a slippery downtrend.
Top ASX stocks to buy in the sector
Macquarie’s top picks in the sector includes the Oil Search share price and Ampol Ltd (ASX: ALD) share price.
Also, on the buy recommendation list are the Worley Ltd (ASX: WOR) share price and BHP Group Ltd (ASX: BHP) share price.
Foolish takeaway
Personally, I prefer the latter two (and that’s why I hold them in my portfolio). Engineering group Worley’s recent results were strong, the group is diversifying into other sectors and the stock is cheap.
BHP is also exposed to other commodities, which have a bright long-term outlook. I also suspect it will look to sell its US oil assets, perhaps in 2021.
It’s worth noting that fossil fuels aren’t consistent with management’s views on climate change.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Santos Limited, and WorleyParsons Limited. Connect with me on Twitter @brenlau.
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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