I'm a trader who specializes in intraday and swing trading rather than long-term investing, but in the fourth quarter of 2015 I really started like Chevron (CVX) . I made the play based upon three main factors:
- Oil prices are cyclical: price declines curtail production and increase demand (have you noticed those record sales of SUVs and RVs lately?) so that prices eventually would rise
- CVX's mix of upstream (exploration and production) and downstream (refining and gas stations) and strong balance sheet would give it the financial strength to navigate the downturn
- The 2014 downturn was oil-specific rather than a general market malaise like 2008
Oil prices have risen above $50 a barrel. OPEC has agreed to cut production and the Saudis are supporting lower production quotas and enlisting other non-OPEC producers such as Russia to participate. Of course, there may be some cheating on the quotas, but for the most part the market looks to have turned and to be supported. There's more room to run in this crude upcycle.
I believe domestic shale players such as APA will be the chief beneficiaries. APA has made massive discoveries in the Alpine High area of the Permian Basin. APA also maintained its dividend throughout the downturn, which is an indication of financial strength and a testament to the firm's focus on adaptability.
APA can increase or decrease production to meet an evolving demand and price structure more readily than many other players. It is a low-cost producer, and if rising production from shale players ends up capping the rise in the price of crude oil below prior peaks of more than $100 a barrel, it's these shale plays that will earn outsize returns.
At a valuation of $25 billion, APA also could be a takeover candidate for a major such as Exxon Mobil (XOM) that may struggle to replace proven reserves and could shift its portfolio toward unconventional onshore plays.