Cold Front, Hot Stocks: Diesel Prices Propel Energy Leaders

Key Points

• Integrated energy companies with strong downstream operations are well-positioned to capitalize on the increased demand and pricing power from higher diesel use.
• Companies with a history of consistent dividend growth and share repurchases offer investors a compelling combination of income and potential capital appreciation.
• Major energy producers are strategically investing in traditional operations and lower-carbon technologies, creating a pathway for long-term, sustainable growth.

 

Multiple factors, including forecasts for an extremely cold winter and rising natural gas prices, are driving a surge in diesel prices. The Department of Energy/Energy Information Administration (DOE/EIA) reported a $0.027 increase in the average retail diesel price, reaching $3.503 a gallon to close out 2024. This jump coincides with a rise in ultra-low sulfur diesel (ULSD) futures, which climbed $0.055 a gallon to settle at $2.2995, marking a 2.44% gain and the highest settlement since November 5th. 

Natural gas prices have also dramatically increased, with the price on the Chicago Mercantile Exchange (CME) rising almost 152% since March 26th. These price movements have significant implications for the transportation sector and the broader economy. As winter approaches and the demand for heating fuels increases, two companies are well-positioned to benefit from the rising tide of diesel prices.

Why Diesel Prices Matter to Investors

Diesel's role extends far beyond fueling trucks and heavy machinery. It is a critical component of the transportation, agricultural, and industrial sectors. Fluctuations in its price ripple throughout the economy. When diesel prices rise, transportation costs increase for businesses, impacting everything from shipping goods to operating farm equipment. These increased costs are often passed on to consumers in the form of higher prices for goods and services. For investors, understanding the dynamics of the diesel market is crucial, especially during periods of significant price movement.

The current surge in diesel prices is particularly noteworthy given the relatively low U.S. inventories of non-jet distillates. As of December 20, 2024, these inventories stood at 116.5 million barrels, considerably lower than the five-year average (excluding 2020) of 125.4 million barrels. This combination of rising demand, driven by cold weather forecasts, and relatively low supply creates a favorable environment for energy companies. 

Higher demand for diesel translates to increased revenue and profitability for those involved in its production, refining, and distribution. Furthermore, the market is anticipating economic data releases, including China's PMI factory surveys and the U.S. ISM survey, which could provide further insights into global oil demand. These factors, combined with the potential for increased diesel demand as a substitute for natural gas in heating, create a compelling investment case for stocks in the energy sector.

Chevron: A Prudent Investment in the Energy Sector

Chevron Corporation NYSE: CVX is the second-largest integrated oil company in the United States and is a prime example of a company poised to benefit from the current market conditions. With a market capitalization of around $265 billion and operations spanning the globe, Chevron's diversified business model encompasses upstream and downstream segments. This vertical integration allows the company to capture value across the entire energy supply chain, from exploration and production to refining and marketing.

Chevron is a Dividend Aristocrat with 37 years of consecutive dividend growth. The company recently announced a quarterly dividend of $1.63 per share. This announcement follows a strong third-quarter 2024 performance, with Chevron reporting earnings of $4.5 billion and a record cash flow from operations of $9.7 billion. These positive results, combined with a strong balance sheet, highlight Chevron's financial strength and its ability to provide investors with both capital appreciation and a steady income stream, with a current dividend yield of 4.40%.

Chevron is focused on streamlining its operations and reducing costs. The company is targeting $2-3 billion of structural cost reductions by the end of 2026. Part of this initiative includes a planned restructuring charge of $0.7 to $0.9 billion after-tax in the fourth quarter of 2024. While these charges represent a short-term expense, they are expected to contribute to improved efficiency and profitability in the long run. Chevron is also actively optimizing its portfolio, as evidenced by the announced $6.5 billion sale of its Canadian assets.

ExxonMobil: A Global Energy Leader

Exxon Mobil Corporation NYSE: XOM is also one of the world's largest publicly traded international energy and petrochemical companies. The company creates another compelling investment opportunity in the current market environment. With a market capitalization of around $475 billion and operations spanning the globe, ExxonMobil is a major player in all aspects of the energy industry. Exxon Mobil’s earnings report for the third quarter of fiscal year 2024 (Q3 FY2024) revealed earnings of $8.6 billion, or $1.92 per share, demonstrating its continued financial strength. The company announced that it had achieved a record liquids production of 3.2 million barrels per day.

Like Chevron, ExxonMobil is a Dividend Aristocrat, boasting 42 consecutive years of dividend increases. The company declared a fourth-quarter dividend of $0.99 per share, a rise of 4%. The current dividend yield of 3.66% provides investors with a reliable income stream. ExxonMobil is committed to returning value to shareholders and has a stated goal to repurchase over $19 billion of shares in 2024. ExxonMobil has demonstrated its commitment to rewarding shareholders through consistent dividend growth and share repurchases, further enhancing its appeal to investors.

ExxonMobil is focused on optimizing its operations and achieving structural cost savings. The company has already achieved $11.3 billion of cumulative structural cost savings and is on track to deliver a total of $15 billion in savings by the end of 2027. In 2025, the company will continue to prioritize high-return, low-cost-of-supply investments, with cash capital expenditures expected to be between $27 and $29 billion.

A Strategic Winter Investment

The current surge in diesel prices is being driven by a combination of seasonal demand and supply constraints, presenting a compelling investment opportunity in energy stocks. Chevron and ExxonMobil, with their strong financial positions, diversified operations, and commitment to dividend growth, are particularly well-positioned to benefit from this trend. As winter approaches and the demand for heating fuels intensifies, these companies are poised to see increased revenue and profitability. 

Chevron and ExxonMobil present attractive investment opportunities for those looking to benefit from the predicted winter price increase. Both companies provide a balance of income and growth potential with strategies that position them for continued success in the changing energy landscape. Their commitment to long-term value and investments in lower-carbon technologies make them suitable options for beginner to intermediate investors navigating the dynamic energy market. Adding these stocks to portfolios before the winter price surge could be a strategic move for potential profit.