Sound as a Barrel: 3 Energy Stocks to Weather the Sector’s Slump
As I witness the latest relapse in energy prices, an ancient Greek myth comes to mind. As the story goes, King Tantalus was condemned by the gods to spend an eternity in hunger and thirst. He was made to stand in the underworld’s zone of punishment, in a pool of water under a fruit tree. Although the tree had low branches, he was never quite able to reach the fruit, and whenever he tried to drink the water, it receded.
Robert Rapier, chief investment strategist of The Energy Strategist, explains how energy investors are being tantalized this year:
“It looked like 2016 was the beginning of a recovery, with the energy sector bouncing back, but thus far 2017 looks like 2015. The energy sector is down. The sentiment is bearish. All news is viewed through a bearish filter.”
But Robert thinks the pain will be short lived: “Despite sensationalistic projections that oil demand could peak soon — which is one factor making the oil markets skittish — global demand growth for crude oil remains high.”
In the meantime, if you’re yearning for exposure to the energy sector but don’t want to end up like the doomed Tantalus, consider the three sturdy energy stocks highlighted below.
The great disconnect…
Recent reports of increased production and an inventory glut are headwinds for oil prices, pushing crude below the important psychological threshold of $50 per barrel.
The U.S. Energy Information Administration reported this week that U.S. crude stockpiles dropped by 1.7 million barrels for the week ended June 9, well short of the 2.7 million barrels decline that analysts had been expecting. West Texas Intermediate has fallen to about $44/bbl and Brent North Sea Crude to about $47/bbl.
Robert Rapier has spent more than three decades analyzing the energy industry. During those 30-plus years, he has seen his share of bull and bear markets. Right now, he’s confident that the gloom in the energy patch is unwarranted:
“The market reaction to recent news suggests to me that we are reaching peak pessimism. After that, hopefully, we can get back to the point that the energy markets are governed by fundamentals for a while.
I still believe everyone needs some exposure to the energy sector in their portfolio. It’s easy to forget given the sector weakness since the oil price collapse, but the energy sector is one of the top long-term performers among S&P 500 sectors.
For now, I will keep making recommendations based on fundamentals, and keep close tabs on supply and demand in preparation for the inevitable reconnection with reality.”
To be sure, oil prices may have further to fall before they bounce back. In addition to supply and demand factors, higher interest rates could also play a role in dampening crude. The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter point, the third such increase in six months and yet another indication that the central bank intends to continue tightening the monetary spigot this year.
Higher interest rates tend to strengthen the dollar and in turn, a stronger greenback means cheaper oil because oil is denominated in dollars.
Three survivor stocks…
Robert Rapier believes that energy’s slump is only temporary, declaring: “I remain bullish on long-term demand for oil and natural gas.”
That makes the following three energy stocks compelling buys now.
Devon Energy (NYSE: DVN)
Devon is different from its troubled peers because management has carefully pruned its balance sheet to keep it strong and lean. By sloughing off non-performing assets and prudently investing in Permian Basin projects, the company has sidestepped the fate of many shale producers that are now fighting to stave off bankruptcy.
Devon’s drilling rigs are exploiting prolific shale formations in Oklahoma and Texas and tar sands in Canada. The company’s largest energy reservoirs lay under the Permian Basin of West Texas. (See my April 20 issue for details on Devon.)
Chevron (NYSE: CVX)
Chevron stands out for its diversification. The giant energy producer boasts a mix of assets, including liquefied natural gas, deepwater fields spread around the world, shale plays in North America, and downstream activities such as refining and retailing. The latter downstream assets confer high margins and help buffer the company from oil price gyrations.
Chevron is a member of The Energy Strategist portfolio and the Growth Portfolio of our flagship publication Personal Finance. Since it was added to the PF Growth Portfolio on March 28, 1990, Chevron has racked up a total return of 1,547.3%. The current dividend yield is a healthy 4.1%. (See my May 20 issue for details on Chevron.)
Halliburton (NYSE: HAL)
Earlier this week, I received the following email from a reader:
“I’d like your thoughts on Halliburton stock in particular and the oil industry in general.” — Jay M.
With a market cap of $38.9 billion and based in Houston, Halliburton is one of the world’s largest oilfield services companies, with operations in more than 70 countries. The stock is down 16.5% year to date, as it gets punished with the rest of its peers.
However, Halliburton is getting a handle on its debt, which is more than I can say for most of its sub-sector. In the fourth quarter of fiscal 2016, Halliburton’s total debt fell 19% compared to the previous year and the company continues to take measures to reduce debt in 2017. At the same time, earnings are projected for stellar increases.
The average analyst expectation is that HAL’s year-over-year earnings growth will come in at 214.3% in the current quarter, 3,000% next quarter, 4,950% in the current year, and 180.4% next year. My calculations show that HAL should rack up five-year earnings growth of at least 23%, on an annualized basis. The stock’s price-to-sales ratio is 2.5, roughly in line with the industry average and lower than chief rivals such as Schlumberger (NYSE: SLB) at 3.4.
Unlike troubled competitors such as Seadrill (NYSE: SDRL) and Transocean (NYSE: RIG), Halliburton is a reasonably valued bet with earnings momentum. DVN, CVX and HAL should all soar when the energy sector eventually resumes its upward trajectory.
Questions or comments? Send me an email: email@example.com — John Persinos
Profits made of sand…
There’s a dire shortage of so-called proppants in the fracking industry, notably of “frac sand.” That spells opportunity for you. Frac sand is a play on energy that many traders ignore, but it’s one of the surest ways to make money today.
A proppant is a solid material, usually sand, designed to keep an induced hydraulic fracture open, during or following a fracturing treatment. An advanced, high-purity sand compound known as Augmented SiO2 is being used to tap the underground riches of North America’s highest producing shale fields. This material is so crucial to the fracking process that some oil producers are paying a steep premium for it.
Augmented SiO2 will continue to experience persistent demand, despite the temporary ups and downs of oil prices. In fact, this new compound already is creating the next wave of energy millionaires.
Robert Rapier has prepared a presentation that explains how you can profit from this opportunity. Robert also will send you his report on three Permian plays that promise investors triple-digit profits.