By Michael Brush, MarketWatch
For months, investors have been complacent about geopolitical risk in oil-producing regions despite the rising number of attacks in the Middle East.
They just got a big wake-up call from the dramatic strike that took out half of Saudi Arabia’s production.
As an investor, how to play this? I suggest three tactics.
1. Short-term traders should take profits as energy stocks rally today and Tuesday. The short-term move will likely fade as investors calm down.
2. But geopolitical risks won’t fade. So long-term investors should buy energy stocks after the initial rally fades. Geopolitical risk is an ongoing feature, not a bug, in energy-producing areas of the world.
Saudi Arabia is in proxy wars with Iran on several fronts. More attacks are likely, points out Goldman Sachs energy analyst Damien Courvalin. President Trump is saber-rattling. Other oil-producing nations like Nigeria, Libya and Venezuela face ongoing risks from rebel groups and domestic political chaos. Fears of global recession, which have weighed on oil prices, are overblown because central-bank, fiscal and market stimulus (lower rates across the yield curve) will kick in.
3. Buy airline stocks in the weakness today. They’re oil-price sensitive, but today’s weakness in these names will probably reverse.
Which companies to favor?
While the majors like BP /zigman2/quotes/207305210/composite BP +0.44% , Shell /zigman2/quotes/205095589/composite RDS.A +0.02% and Exxon Mobil /zigman2/quotes/204455864/composite XOM +0.77% might make sense, especially because of their dividends in the 5%-6% range, I suggest U.S.-based companies. The reason: Security of supply is now the name of the game. And while U.S. infrastructure is vulnerable, it is outside the range of Iranian missile strikes.
I also favor names where insider buying has been robust. Insiders favor North American companies too. Insider buying is the starting point for stock analysis in my stock newsletter, Brush Up on Stocks . Below are five names I was bullish on in my letter during the energy-sector weakness in July and August, ahead of the 8%-16% September moves in the Energy Select Sector SPDR /zigman2/quotes/206420077/composite XLE +1.33% and SPDR S&P Oil & Gas Explore & Production /zigman2/quotes/203527521/composite XOP +2.96% exchange traded funds before today’s spike. Those gains far surpassed the 4% advance in the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.47% in September.
Many of these companies have a weighting toward natural gas. But that’s OK because a lot of natural gas production happens in parts of the world with geopolitical risk — like the Middle East. The Saudi strikes remind energy import giants like China, India and Japan of the vulnerability of their energy supplies. This will make them more interested in securing natural gas from a more politically stable place like the U.S. These factors — plus the relative cheapness of natural gas in the U.S. — will increase interest in U.S. liquid natural gas (LNG) exports.
Continental Resources (TICKER:CLR)
The insider buying: Founder Harold Hamm has purchased $78 million worth of stock so far this year at $39 to $44. He and his family own about 75% of the stock.
This energy company enjoys a low-cost advantage because it was a pioneer in snapping up shale assets. Continental discovered the South Central Oklahoma Oil Province (SCOOP) energy field, and it played a key role in the development of the Bakken Shale in North Dakota.
Second-quarter production rose 17% compared to the year before. Oil production rose 23%. Around 60% of production is oil. Most of the rest is natural gas. Continental forecasts 12.5% annual production growth over the next five years.
Because of the low costs, Continental is a cash-flow machine. It is using a lot of that cash to buy back stock in a $1 billion buyback program. “We did not dilute shareholders over the last few years as many did,” CFO John Hart said in the second-quarter conference call. “So our buyback program is a buyback in the truest sense.”
Occidental Petroleum (TICKER:OXY)
The insider buying: Since early June a cluster of insiders including the CEO and CFO has put about $6 million into the stock at prices ranging from $43 to $50.