Pipelines? Integrateds? Independents? Natural gas? Drillers? What can you buy with crude up seven of eight days, both because of OPEC cuts and increased demand from the industrials and emerging markets?
I think there was a time when the answer was "any one of these." With the frigid cold in the east and a preponderance of stock traders in the frozen Wall Street area, you would normally go with natural gas. It's been in a huge glut, so bad that the needle doesn't seem to move, no matter what. So, the natural pick -- the oil and gas companies with the most exposure to natural gas -- simply won't participate the way they used to.
If you can avoid any of the pure natural gas picks, especially around the Marcellus shale in Pennsylvania or Utica shale in Ohio, please do so. The stuff is just not needed in the quantities we have, and the export system is not yet built out. If the weather stays like this for a couple of days and these stocks don't participate, trim, trim, trim. The surfeit may be just too big to budge.
Drillers and service companies? I think that the technological improvements are so great that you simply don't need as much drilling equipment as you used to. I also question how much service you actually need at this stage. Domestically, Halliburton (HAL) should do well, as there is still plenty of drilling in the Permian, but not as much as you would think.
If General Electric (GE) weren't so desperate to raise cash, you would normally see some buyers of Baker Hughes (BHGE) . But the market has figured out that this might be the first thing that has to go in order to shore up the cash needed to meet the substantial obligations that we are just beginning to understand that GE has. The spinoff was just another cheap trick in former CEO Jeff Immelt's financial engineering game plan to try to bring out value. It will most likely be the subject of a fire sale, so no, thank you.
Members of Action Alerts PLUS, the portfolio that I co-manage as a charitable trust, know that I am stubborn and have dug my heels in on Schlumberger (SLB) , because the man who called the downtown the whole way, both loudest and first, is Paul Kibsgaard; now he's changed his tune and is calling for an up year based on the need for countries to replenish their assets. He made that call when oil was in the low $50s and the stock was right around here, so you haven't missed much with crude at $60. I would be a buyer.
We know from last year that the big oils no longer trade together. There was tremendous disparity as investors have settled on Chevron (CVX) as a growth oil and BP (BP) as a safe stock with a good dividend and a lower tax rate for its U.S. properties, something the company called out today as beneficial to American profits. What a comeback that company has had since the Macondo spill in the Gulf of Mexico, with still more to come.
Exxon (XOM) is well behind the group, but it should be, as it lacks the growth of the other two. You don't need too many winners in the space, so don't go ETF hunting, it's not worth buying the bad with the good.
The independents? That's easy: any companies with great Permian oil growth will work. Look to Cimarex (XEC) , Diamondback (FANG) and Concho (CXO) , as they fit the profile.
Finally, the best positioned stocks at these prices are the pipelines. First, the group is way below where it was when oil was last at these prices before. Second, the pipeline companies are no longer struggling with the U.S. government, which is greenlighting pretty much everything. Third, the independents are desperate for new pipelines to take natural gas out of the Marcellus and Utica to the south and the northeast, and to take oil and gas out of the Permian for export.
That's why I would buy pretty much any of these, whether they be the well-run companies like Magellan Midstream Partners (MMP) -- the one Action Alerts PLUS club members know I trust because of its vast Permian exposure -- or Enterprise Product Partners (EPD) , which is very high quality. If you have owned Energy Transfer Partners (ETP) or Williams Companies (WMB) , you might as well hold on at this point for the rising tide.
Some may want to buy the entire oil and gas group based on the new tax codes; they were among the highest payers and could see a dramatic lift in earnings. Me? I say, don't outthink it: the group trades on asset growth, not after-tax earnings, although the change will allow bullish analysts to take up numbers for those few that actually have a big U.S. profit.
Consider this story as your game plan for this suddenly revitalized group, energized by $60 oil, a welcome level for the entire group. But selectivity will matter more than ever -- so stay close to these guidelines for the best profits in the sector.
