Key Points
Devon Energy, Diamondback Energy, EOG Resources, and Permian Resources are all large U.S. energy producers.
Energy prices have a long history of volatility, often rising and falling dramatically.
Energy prices are high right now, but that isn't likely to last forever.
There are two things that connect Devon Energy (NYSE: DVN), Diamondback Energy (NASDAQ: FANG), EOG Resources (NYSE: EOG), and Permian Resources (NYSE: PR), since all four are, one, U.S.-based, and two, energy producers. That's been a very good thing lately, as energy prices have been strong. But history is very clear that energy prices won't stay strong forever. Here's why you may want to sell now to lock in some gains before it's too late.
The geopolitical conflict is a big energy issue
Energy prices rise and fall over time. There are any number of reasons why energy prices change, from supply and demand dynamics to disasters (manmade and otherwise) to geopolitical conflict. That last one is what's driving prices higher today, with the geopolitical conflict in the Middle East upending global energy markets.
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There's been a secondary benefit for U.S. energy producers such as Devon Energy, Diamondback Energy, EOG Resources, and Permian Resources because countries around the world are rethinking energy security. That makes production from an economically and politically stable region like North America extra attractive. So there is reason to be optimistic about these companies over the long term.
However, you can't ignore the key fact here: commodity prices are the main driver of an energy producer's business. The graph below makes that very clear, as you can see that the stocks have been tracking the price of West Texas Intermediate (WTI), a key U.S. energy benchmark (the blue line).
The conflict will only last so long
The problem is that oil prices have been moving in line with investor sentiment amid the geopolitical conflict in the Middle East. Energy prices rise when investors think the conflict is worsening; they fall when the outlook for the conflict improves. However, from a big-picture perspective, the conflict is unlikely to last forever. That means that there could be material downside risk in owning pure-play producers like Devon Energy, Diamondback Energy, EOG Resources, and Permian Resources.
With nothing to soften the blow when commodity prices fall, their revenues and earnings will take a hit. And investors won't wait for quarterly earnings to find out how bad it is; they'll start selling as soon as energy prices begin to decline. Or at least, that's what history shows is most likely to happen.
If you have been lucky enough to benefit from the rising tide that's lifting all of the boats in the energy production space, it might be time to take some profits. That's what I would be considering right now, while energy prices remain elevated. The big wild card that would push me to pull the trigger was the midterm elections, which seem likely to lead to a more dovish stance in both the U.S. Congress and the House.
If I'm correct in my assumption here, the conflict will lack the political support it has had up until now. And that could force a resolution that would ultimately lead to lower energy prices.
Don't market time, but don't ignore the obvious
I own a pipeline company (Enbridge (NYSE: ENB)) and an integrated energy giant (TotalEnergies (NYSE: TTE)) specifically to minimize the impact of volatile energy prices on my energy investments. Buying stocks like Devon Energy, Diamondback Energy, EOG Resources, and Permian Resources is basically going all in on commodity risk. In fact, investors often buy stocks like these specifically to benefit from rising energy prices.
I think you should buy and hold for the long term, which is why I own what I own. However, if you've chosen to buy a pure-play energy producer, you may want to reconsider your commitment given the evolving narrative in the energy sector. That's not a market-timing call; it's just a realistic view of the sector's changing situation. If you still want some energy exposure, you might consider shifting into a high-yield, fee-driven pipeline stock like Enbridge or Enterprise Products Partners (NYSE: EPD).
Reuben Gregg Brewer has positions in Enbridge and TotalEnergies Se. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends EOG Resources and Enterprise Products Partners. The Motley Fool has a disclosure policy.