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All Contents © 2017The Kiplinger Washington Editors
By Vince Martin
| July 2017
It has been rough sledding for oil stocks so far in 2017. There were some signs of optimism last year — at least for those companies able to survive the oil bust that began in late 2014. But fears of ramped-up production in U.S. shale plays has pressured oil prices — and oil stocks.
Year-to-date, WTI spot crude prices are down about 14%. The SPDR S&P Oil & Gas Explore & Prod. (ETF) (XOP) is down a whopping 24% in 2017. The sector received a modest bump in late June, as oil prices gained for eight straight days. But those gains have almost totally reversed.
With oil still below $50, many investors might choose to ignore the space entirely. But there could be a contrarian opportunity here — if oil prices cooperate. Obviously, that is a big if, and as always oil stocks — whether producers or equipment suppliers — generally are high risk.
But they can be high reward as well. For investors looking to time the bottom in oil, here are five of the best stocks to play a spike in oil prices.
Prices and data are from the original InvestorPlace story published on July 12, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Carrizo Oil & Gas Inc. (CRZO) stock has been the epitome of the oil & gas rollercoaster of the past few years. CRZO went from near $20 at the beginning of 2013 to a high of $70 in mid-2014. By the beginning of 2016, Carrizo was back at 2013 levels. And after losing some 56% of its value just in 2017, CRZO stock now trades at a multiyear low.
That low comes despite some optimism toward a recent acreage acquisition in the Delaware Basin. Investors liked the deal: CRZO would gain 11% in the next two sessions, despite an equity offering below $15 used to finance the purchase. The deal — along with likely asset divestitures that will follow — focused Carrizo on two of the most successful shale plays: the Permian (which includes the Delaware) and the Eagle Ford.
The acquisition also seems to position Carrizo well for a “lower for longer” scenario — yet the sell-off continues, with CRZO dipping back below $15 on Friday. There’s definitely risk here, and a “falling knife” problem. But for contrarian investors bullish on oil prices, in particular, it is worth at least a long look.
Despite heavy natural gas holdings, Chesapeake Energy Corporation (CHK) stock tends to follow oil prices. So far in 2017, CHK stock has followed those oil prices pretty much straight down.
CHK actually trades near an 11-month low after breaking support that had held at $5 on several occasions. But if oil prices rebound, it’s hard to see a better play than Chesapeake Energy.
After all, both the balance sheet and operations have improved. Meanwhile, Chesapeake continues to lower its breakeven costs. Higher realized prices won’t just give Chesapeake a chance to pay down its debt, as appeared the case in 2015 and early 2016. They can drive real profits and consistent cash flow. The leverage on the balance sheet suggests the equity holders in CHK would benefit dramatically from that type of improvement.
Chesapeake isn’t without risk. Many of its debt maturities have been moved out, but Chesapeake still would struggle in a “lower for longer” environment, particularly if crude prices dip further. But for investors looking for $50-plus oil — and maybe some help from natural gas — I still believe CHK might be the best play in the entire market.
One of the problems with investing in oil and gas — particularly at the moment — is that it’s hard to find a defensive play in the sector. Pretty much all of the exploration and production companies have reasonable, if not risky, amounts of debt. Equipment and service providers are at the mercy of drilling activity. And majors like Exxon Mobil Corporation (XOM) and ConocoPhillips (COP) are so diversified that they’re not necessarily major beneficiaries of higher oil prices.
But Schlumberger Limited (SLB) is a somewhat defensive play in the space (emphasis on "somewhat"). And it’s starting to look cheap. SLB stock is near lows seen in early 2016 – at the worst of the oil bust. Its dividend yield now is 3%.
For a company with global reach, and dominant share in many of its end markets, the recent declines seem like they might be a bit overwrought. SLB probably won’t rebound as much as smaller, more leveraged players in the event oil prices strengthen. But at the moment, it’s one of the lowest-risk plays on oil prices stabilizing, if not soaring.
On the other side of the services space is mid-cap Weatherford International (WFT). Weatherford is much smaller than Schlumberger — and much riskier.
Weatherford’s balance sheet is weaker, and its competitive position against both Schlumberger and Halliburton Company (HAL) raises some questions. Despite a recently formed joint venture with Halliburton, WFT stock has continued to slide – which creates its own problem. Weatherford was hoping that warrants and convertible debt would be turned into equity — providing much-needed cash. With both out of the money, that potential source of funds looks less likely.
That makes WFT a risky play — but it also means there’s huge upside if the bull case plays out. A rebound in WFT stock helps the balance sheet — which in turn should help Weatherford stock. The operating leverage from oil field players means more drilling leads to higher utilization, which helps both sales and margins. And there’s still a chance that SLB or HAL could decide to take Weatherford out.
Once again, this is a highly risky play. But there are few stocks in the oil sector — or anywhere else — with as much upside if the bull case plays out.
By E&P standards, Parsley Energy Inc. (PE) hasn’t had a bad 2017. After all, PE stock is down “only” 20% year-to-date.
And there’s reason for some optimism, with PE stock just off its 52-week low. Parsley’s focus is on the Permian Basis, primarily so-called ‘stacked’ plays. A major acquisition in February added to its holdings in that play, and led to raised production guidance last month.
So far, that’s done little for PE stock. But for investors who believe that U.S. shale producers can outlast a “lower for longer” scenario through improved drilling techniques, Parsley Energy is probably the purest play on that thesis. And if oil prices finally cooperate, PE stock could reverse its losses quickly.
This article is from Vince Martin of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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