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Dec. 16, 2014, 10:33 a.m. EST

It’s time to stock up on oil stocks

Oil prices will bounce back, and so will the best companies

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By Michael Brush

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The best energy stocks

Hicks favors quality names like Devon Energy /zigman2/quotes/209479244/composite DVN -3.64%  , which he says has low-cost acreage in the Eagle Ford Formation purchased earlier this year, good holdings in the Permian Basin, solid cash flow, and significant hedges in place on 2015 production.

Hicks also likes oil-services companies with high-quality rigs that are let out in long-term contracts, which theoretically protects earnings and dividend yields. One is Helmerich & Payne /zigman2/quotes/209685666/composite HP -0.38%   , which pays a 4.4% dividend yield. Another is Noble /zigman2/quotes/225474075/composite NE -0.61% , an offshore drilling company with a dividend yield close to 10%. Noble looks particularly cheap, trading at half of book value. Noble’s rigs are on deep-water drilling projects, which tend to be less vulnerable to fluctuations in oil prices.

Breard, at Hodges Capital Management, favors North American energy companies that have been hit by the decline in the price of oil — despite the fact that they get a lot of revenue from natural-gas production, or they have the flexibility to shift to natural-gas production.

“I like companies that have optionality and diversification,” says Breard. In this category, he highlights Matador Resources /zigman2/quotes/204387276/composite MTDR -3.53% , which has been aggressively cutting costs, Comstock Resources /zigman2/quotes/205709071/composite CRK -0.27%  , which raised a lot of cash by selling off assets before the sharp decline in energy prices, and Panhandle Oil and Gas /zigman2/quotes/203566437/composite PHX -1.14%  , which gets almost half its revenue from natural-gas production.

Natural-gas prices are likely to hold up in North America for at least three reasons, say analysts at Canaccord Genuity Group. They are: 1) Coal-fired power plants are being shut down and replaced by natural-gas plants; 2) many companies are setting up manufacturing in North America to take advantage of the low natural-gas prices there compared to the rest of the world; and 3) natural gas exports from North America will pick up.

Plus an unexpectedly cold winter would put a bid under natural-gas prices, which is my own forecast,

Like Breard, analysts at Canaccord Genuity favor companies that tilt towards natural-gas production, or have the option to move in that direction, as long as they have solid financial strength and flexible budgets. In this category, Canaccord favors Suncor Energy /zigman2/quotes/210480277/composite SU -3.48% , Canadian Natural Resources /zigman2/quotes/203976248/composite CNQ -2.99% , Sanchez Energy and Gulfport   /zigman2/quotes/226807363/composite GPOR -5.51%  .

Energy analysts at Deutsche Bank favor companies with the balance-sheet strength to survive, but also the budget flexibility, asset quality and performance record to suggest they have the moxie to return to growth when energy prices go back up. Deutsche Bank says companies in this category include Anadarko Petroleum , EOG Resources /zigman2/quotes/204634330/composite EOG -4.73%  , Cimarex Energy /zigman2/quotes/205517948/composite XEC -3.11%   and Concho Resources

The downside risk

How might I be wrong? Well, a lot of smart people disagree with me (and Pickens) about where oil prices are going. If they’re right, the energy stock trade is going to be a dud.

T. Rowe Price commodity-sector analyst Tim Parker concedes oil might be due for a bounce, on a technical basis. “But 2015 looks messy from a fundamental perspective,” he says. The U.S. moves out of the heating oil season in April. U.S. producers could take up to a half a year to cut back, since so many projects are well under way. Iraq is increasing production. Iran could come back on line soon if the embargo is lifted. Major projects are ramping up in the Gulf of Mexico and Brazil.

“You have a lot of places growing supply,” says Parker. “Meanwhile the global economy is not rip-roaring, so demand is skittish. I think we are near a near-term bottom. I just don’t know what 2016 or 2017 will be like.”

Given all the uncertainty, if you buy energy stocks here, you’re going to have to be patient. Sure, there will be asset grabs via takeovers given that energy stocks are so hammered. So you could see a quick pop. On Dec. 12, for example, Talisman Energy  jumped 35% to $4.95 on takeover news.

But for energy contrarians, the best approach will be to buy energy stocks in stages as they bounce around. Accept that you aren’t going to buy the absolute low, and then wait it out.

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Over the past several years, Brush has suggested Devon Energy, Matador Resources, EOG Resources and Panhandle Oil and Gas to subscribers of his stock newsletter,

/zigman2/quotes/209479244/composite
US : U.S.: NYSE
$ 64.13
-2.42 -3.64%
Volume: 10.28M
Dec. 6, 2022 4:00p
P/E Ratio
6.75
Dividend Yield
8.06%
Market Cap
$43.50 billion
Rev. per Employee
$12.84M
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/zigman2/quotes/209685666/composite
US : U.S.: NYSE
$ 47.01
-0.18 -0.38%
Volume: 1.11M
Dec. 6, 2022 4:00p
P/E Ratio
811.92
Dividend Yield
2.13%
Market Cap
$4.97 billion
Rev. per Employee
$294,135
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/zigman2/quotes/225474075/composite
US : U.S.: NYSE
$ 35.97
-0.22 -0.61%
Volume: 1.21M
Dec. 6, 2022 4:00p
P/E Ratio
28.79
Dividend Yield
N/A
Market Cap
$4.74 billion
Rev. per Employee
$524,407
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/zigman2/quotes/204387276/composite
US : U.S.: NYSE
$ 59.29
-2.17 -3.53%
Volume: 1.12M
Dec. 6, 2022 4:00p
P/E Ratio
6.04
Dividend Yield
0.67%
Market Cap
$7.26 billion
Rev. per Employee
$10.68M
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/zigman2/quotes/205709071/composite
US : U.S.: NYSE
$ 14.81
-0.04 -0.27%
Volume: 4.47M
Dec. 6, 2022 4:00p
P/E Ratio
4.34
Dividend Yield
0.00%
Market Cap
$3.47 billion
Rev. per Employee
$16.18M
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/zigman2/quotes/203566437/composite
US : U.S.: NYSE
$ 3.48
-0.04 -1.14%
Volume: 173,408
Dec. 6, 2022 4:00p
P/E Ratio
16.87
Dividend Yield
2.30%
Market Cap
$128.24 million
Rev. per Employee
$3.41M
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/zigman2/quotes/210480277/composite
US : U.S.: NYSE
$ 29.97
-1.08 -3.48%
Volume: 7.54M
Dec. 6, 2022 4:00p
P/E Ratio
6.89
Dividend Yield
5.22%
Market Cap
$42.63 billion
Rev. per Employee
$2.57M
loading...
/zigman2/quotes/203976248/composite
US : U.S.: NYSE
$ 55.42
-1.71 -2.99%
Volume: 2.17M
Dec. 6, 2022 4:00p
P/E Ratio
6.91
Dividend Yield
4.56%
Market Cap
$66.36 billion
Rev. per Employee
$3.36M
loading...
/zigman2/quotes/226807363/composite
US : U.S.: NYSE
$ 70.69
-4.12 -5.51%
Volume: 126,461
Dec. 6, 2022 4:00p
P/E Ratio
8.35
Dividend Yield
N/A
Market Cap
$1.44 billion
Rev. per Employee
$11.10M
loading...
/zigman2/quotes/204634330/composite
US : U.S.: NYSE
$ 127.79
-6.35 -4.73%
Volume: 5.03M
Dec. 6, 2022 4:00p
P/E Ratio
10.04
Dividend Yield
2.58%
Market Cap
$78.79 billion
Rev. per Employee
$10.37M
loading...
/zigman2/quotes/205517948/composite
US : U.S.: NYSE
$ 87.20
-2.80 -3.11%
Volume: 0.00
Sept. 30, 2021 3:00p
P/E Ratio
N/A
Dividend Yield
1.24%
Market Cap
$8.97 billion
Rev. per Employee
N/A
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