(MSN) - 2021 turned out to be a great year for stocks. But according to Kyle Bass, founder and chief investment officer of Hayman Capital Management, 2022 may not be as rosy.
“With interest rates concurrently with quantitative tightening, there’s no way the stock market goes up this year; it probably goes down pretty aggressively, if they stick to that plan,” he said in a recent CNBC interview.
Consumer prices climbed 7% in 2021, the fastest 12-month pace in nearly 40 years, according to figures released in December. To tame spiking inflation, economists expect the Federal Reserve to raise interest rates this year, potentially multiple times.
And that could trigger a sell-off. Bass predicts that if short-term interest rates increase by just 100 or 125 basis points, that could lead to a 25% drop in the stock market.
At the same time, the hedge fund manager points to one asset that he believes will shine in 2022 — oil.
Will oil prices soar above $100?
Oil prices have already been on the rise, with West Texas Intermediate — a benchmark for crude oil — climbing from $53 to $83 per barrel over the last 12 months.
And Bass expects that uptrend to continue.
He points out that there has been a lack of investment in the hydrocarbon industry. Combined with the increasing demand as the global economy recovers from the pandemic, Bass says we could see oil prices rising to “well north of $100” this year.
“Buckle your seatbelts,” he added in the interview.
How to invest in oil stocks
There are many ways for investors to play an oil price rally.
Big producers, for instance, are well-positioned for such a scenario.
In fact, they are already firing on all cylinders. Exxon Mobil (XOM) shares surged 42% over the past 12 months, Chevron (CVX) climbed 35%, while ConocoPhillips (COP) shot up 79% during the same period.
As you’d expect, when oil prices went up, these companies were gushing profits.
In Q3 of 2021, Exxon Mobil generated earnings of $6.8 billion, or $1.58 per share, compared to a loss of $680 million, or $0.18 per share, in the same quarter the year before.
Chevron reported $6.1 billion in earnings for the quarter, compared to a loss of $207 million from a year earlier. Meanwhile, ConocoPhillips went from a loss of a half-billion dollars to earnings of $2.4 billion.
Thanks to their booming businesses, these supermajors boosted their 2021 dividend payouts.
Finding yield beyond Big Oil
Of course, if you are really looking for yield, you might want to check out some midstream operators that also stand to benefit in a rising oil price environment.
Enterprise Products Partners (EPD), for instance, operates approximately 50,000 miles of natural gas, natural gas liquid (NGL), crude oil, refined products, and petrochemical pipelines. It pays quarterly distributions of 46.5 cents per unit, translating to an annual yield of 7.8%.
Then there’s Energy Transfer (ET), another midstream oil and gas company paying generous cash distributions to investors. With a quarterly distribution rate of 15.25 cents per unit and a unit price of $9.50, Energy Transfer offers an annual yield of 6.4%.
To put things in perspective, the average dividend yield of S&P 500 companies is just 1.3% at the moment.
The volatile commodity market
Crude oil is a commodity — in fact, it’s the most liquid commodity futures market in the world. If you don’t feel comfortable trading futures contracts, you can get exposure through exchange-traded funds that follow the commodity. For instance, the United States Oil Fund (USO) is an ETF with an objective to track the daily changes in the price of WTI crude.
Other ETFs focus on companies involved in hydrocarbon exploration, such as the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Meanwhile, if high yield midstream partnerships are what you are interested in, Alerian MLP ETF (AMLP) should provide a good starting point for further research.
Just remember, crude oil is volatile. While oil-related investments can do well in an oil price rally, they can drop just as quickly when the price of a commodity goes south.
By Jing Pan
Jan 20, 2022
