The Perfect Oil Chaos Stock

This post The Perfect Oil Chaos Stock appeared first on Daily Reckoning.

Everybody is scrambling to navigate this market successfully.

And it’s not going to get any easier going forward.

All of us are hoping for a quick resolution to the Iran war, but there’s a good chance it drags on for a while.

And if we do see a ceasefire, there’s a very good chance the conflict starts up again once both sides are re-armed and reorganized. Let’s not forget that it was just last summer that Israel and Iran were at war last time.

As investors, we must play the cards we’re dealt. Along those lines, many of us are seeking to buy more oil stocks.

But which oil stocks you own matters greatly right now.

One problem is that most big oil companies (majors) send crude through the Strait of Hormuz, which is currently blocked by the Iranians. The only ships getting through today are Iranian and Chinese.

The graphic below, via Goldman Sachs, shows the percentage of oil majors’ production which goes through the Strait of Hormuz.

Source: Goldman Sachs

I couldn’t find a better version of this chart, and realize it may be hard to read. So here’s a summary of the findings.

Percentage of oil production that goes through the Strait of Hormuz:

• Exxon: 20%
• BP: 12%
• Shell: 7%
• COP: 3%

Exxon (XOM) has been one of my favorite ways to play the oil market, but this is concerning. 20% of production has nowhere to go. Storage is likely getting full, so many of these wells will have to be shut down if Hormuz remains closed.

So while Exxon is a well-diversified company, and they are benefiting from higher prices, much of that boost is offset by losses from the Strait of Hormuz. Eventually the situation in the Middle East will be sorted out, but it could take a while.

And investors seem to prefer oil stocks without exposure to this volatile area. As reported by the Houston Chronicle:

Prices for crude and gasoline at the pump have skyrocketed, but the high price of oil isn’t necessarily enough to counteract the impacts to some of Houston’s global oil majors with operations in the Middle East and in parts of Africa affected by the conflict.

Stock prices for the majors have not benefited nearly as much as those for oil and gas giants who focus almost entirely on American production, such as Diamondback Energy and Devon Energy. Both companies have seen lucrative spikes in share price in the wake of the conflict.

So companies with no exposure to the Middle East are outperforming ones with some. Diamondback and Devon look interesting, but I haven’t researched them yet, so can’t really comment.

However, one oil stock that we’ve discussed extensively is also breaking out.

Back to Brazil and Petrobras!

Long-time readers know I’ve been bullish on Brazilian oil giant Petrobras (tickers: PBR and PBR.A) since last May. We’ve written it up 6 times since.

When we first covered it, shares were trading at $12.07. For the first 8 months, it didn’t do much. And that was fine with me. I simply reinvested my dividends and waited.

But since January the stock has jumped to $18.81. And even after that impressive run, the stock still trades at a P/E of just 8 (which is based on $60-ish oil). That’s still dirt cheap.

If oil stays at current levels, the dividend yield should exceed 10% going forward.

On an operational level, the company is performing extremely well. Oil and gas production jumped 11% in 2025. That’s impressive for a $112 billion company.

Petrobras’s secret to success is its unique exploration and drilling methods. The company specializes in drilling “pre-salt” offshore oil fields. Here’s a diagram:

Source: Petrobras

Brazil is estimated to have around 100 billion barrels of pre-salt oil, and there is certainly more to be discovered. Petrobras will develop the vast majority of that.

Pre-salt oil is deep and difficult to reach. It took decades to develop the technology to where it is today. But this is among the purest oil in the world, and there is a LOT of it. A single FPSO ( Floating Production Storage and Offloading vessel), like the one above, can produce up to 250,000 barrels a day.

All-in, the cost for Petrobras to produce a barrel of this oil is around $35 per barrel. Today they’re selling at $87. What a beautiful business model.

And the company recently announced Q4 earnings, where it beat expectations handily.

No Middle East Exposure

Petrobras operates almost exclusively in Brazil, so it is well insulated from the chaos of the Middle East.

It is churning out around 3.11 million barrels of oil-equivalent per day.

The company operates 11 oil refineries, and produces a wide range of petroleum products. Diesel, gasoline, natural gas, lubricants, chemical feedstocks, solvents, etc.

With many of the Middle East’s refineries shut down, there will be extremely high demand for all of Petrobras’ products.

Even if oil falls back to $65 (which I don’t expect) Petrobras would be fine. They were churning out cash flow and paying fat dividends at that price.

This is, by far, my favorite oil stock during this crazy time. Dirt cheap, high yield, solid growth, plentiful reserves, and in an uptrend.

What more could an oil investor ask for? I added to my position just this week.

One final note. There are 2 classes of Petrobras shares to choose from. PBR (common) and PBR.A (preferred). They both represent the same amount of company equity, and both get the same dividend. Technically PBR.A has preference for dividends, but in practice that hasn’t been the case.

PBR.A trades a bit cheaper, so the dividend yield is higher. I own that one. But the difference is minor.

Like any other stock, it’s not a sure thing. Shares have risen significantly, but if oil stays elevated, there’s still major upside from here. In this chaotic world, it’s as good as we’re going to find.

The post The Perfect Oil Chaos Stock appeared first on Daily Reckoning.

This story originally appeared in the Daily Reckoning . The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.

Source: https://dailyreckoning.com/the-perfect-oil-chaos-stock/