Oil Services and Refinery Stocks Deserve a Niche in Your Portfolio

Oil drilling and production firms are closely tied to underlying commodity prices. Several leading investment experts and contributors to MoneyShow.com prefer seeking exposure to the energy sector through niche markets such as oil services, transportation and refinery operations. Here are six favorite ideas. Elliott Gue, Energy and Income Advisor I think this is a great time for investors with a longer-term time horizon to take a position in Schlumberger Ltd. , which is still the pre-eminent energy services company in the world. To be sure, the past few years' share price performance has been horrible. The shares returned just 1.7 percent a year including dividends since the bull market started in March 2009. The company itself, however, has kept its balance and sector lead over the past decade, as well as its A+ credit rating and generous dividend while consistently generating high levels of free cash flow. That's truly remarkable when you consider the extreme volatility in energy prices over that time, and especially the rise of shale. Shale's growing importance in global oil and gas production has really turned drilling economics on its ear. Schlumberger has long had a core competency in deepwater technology. The world really needs a balance between short cycle shale output and long cycle developments including deepwater. With falling energy prices in 2014-17, spending on deepwater developments collapsed alongside most other projects outside North American shale so that business and expertise didn't help them much. However, I do believe that's changing. We've rated this stock a buy up to $65 for quite a while. It trades for barely half that. But we continue to believe Schlumberger is more than capable of revisiting its late 2014 highs that were close to $120. Tom Hutchinson, Cabot Dividend Investor China will account for 40% of global natural gas demand growth between now and 2024. In other places in Asia as well as Europe, natural gas is the most in-demand fuel source, often selling at prices four or five times higher than U.S. gas. In order to export the stuff it has to be converted to liquid form (LNG), loaded onto tankers and shipped overseas. Cheniere Energy Partners is a Master Limited Partnership (MLP) that owns and operates this country's first and largest liquid natural gas (LNG) terminal, Sabine Pass in Louisiana. Cheniere Energy Partners is an MLP of parent company Cheniere Energy , which owns several other facilities and markets LNG worldwide. CQP only operates Sabine Pass and its support facilities. It's important to note that Cheniere Energy Partners only collects fees for the service of LNG processing as well as ship loading and unloading. It has zero exposure to volatile commodity prices. As an MLP, Cheniere Energy Partners pays a strong quarterly distribution with a current yield of 5.35%. But the payout has grown 8.8% over the last three years and should continue to grow in the future. Overall, CPQ is a pure play on the growth of U.S. natural gas exports and benefits solely and directly from the strong and growing demand for liquid natural gas, the world's fastest growing commodity. Roger Conrad, Conrad's Utility Forecaster Roughly 40 percent of U.S. natural gas moves through pipelines owned by Kinder Morgan Inc . And the company has sizeable operations transporting crude oil and refined products, terminals that store 80 percent liquids and 20 percent bulk commodities, and a carbon dioxide manufacturing business that also produces oil and natural gas liquids. That breadth and scale of operations means quarterly results often highlight sector-wide trends. What we learn is not just key to investing in Kinder, but to the entire North American energy midstream sector. Kinder's most important third-quarter number was the 13% increase in natural gas transport volumes. That's the seventh consecutive reporting period of at least 10% growth. And that trend will continue at least through next year, with the company's Gulf Coast Express Pipeline and Elba Island liquefied natural gas export facility now operating. Despite areas of weakness, overall operating goals and financial guidance were on track. That highlights the scale, financial power and operational diversification in the North American midstream business that are the company's key underlying strengths. Management is still guiding to an increase in the quarterly dividend from 25 to 30 cents per share next April. That's a yield of nearly 6 percent for investors who buy Kinder below our recommended entry point of $22. Mike Cintolo, Cabot Top Ten Trader Valero Energy needs no introduction, as it's one of the country's leading refiners. The stock is strong because business is good and getting better, with investors turning more bullish on cyclical names. The company recently reported an estimate-beating third quarter, with EPS and revenue coming in 9% and 12% higher than expectations, respectively, with management offering soothing words about the fourth quarter. The refining industry had hit a road bump in 2019 as prices on heavy, sour crude oil feedstock rose due to infrastructure and production constraints in Canada and Mexico, OPEC cuts, and Iranian and Venezuelan sanctions, all of which put a lid on profit margins; Valero's 2019 profits are expected to fall 33%. But a huge catalyst is coming in 2020, and consensus estimates now point to 95% earnings growth next year. That catalyst is IMO 2020, the nickname for the International Maritime Organization's new mandate that the world's 39,000 ships and tankers use either scrubbers or low-sulfur diesel fuels in order to minimize sulfur oxide emissions into the atmosphere. IMO 2020 is going to be expensive for businesses that import or export products across the world's oceans, and it's going to be expensive for consumers who purchase those products. But it's going to be a windfall for Valero, which will fulfill the demand for low-sulfur diesel fuel and earn good profits from it. Besides the earnings bump, the company's cash return program is a plus--Valero sports a 3.6% dividend today (should go up with next year's earnings surge), and it's been aggressively buying back shares as well. Jason Clark, The Prudent Speculator Halliburton reported third-quarter earnings per share of $0.35 that just beat analyst estimates of $0.34. The badly-battered shares rebounded 11% in price last week, thanks in part to the fact that the bottom line was not worse and due to news that the world's second largest oil services company intends to expand international operations while cutting costs domestically. We think the latter is the right move given the current dynamics within the shale space, where exploration and production operators are slashing their capital expenditure budgets to satisfy cash flow objectives. CEO Jeff Miller said that Halliburton had stacked more equipment in this quarter than it did in the previous six months combined. Similar to 2016, where management was able to save $1 billion in costs, the company thinks it can do the same this time around on the back of new technologies across wireline and fracturing services. Mr. Miller spoke very positively about Halliburton's prospects abroad. The company is finding growth within unconventional, later-cycle well productivity projects, while it continues to execute its traditional drilling and completion contracts. Undoubtedly, these remain trying times for those invested in the energy sector. On a positive note, it appears a rebound may finally be gaining traction internationally. Moreover, we believe long-term energy demand growth should offer a tailwind with the global population expected to expand to 9 billion and economic output more than doubling by 2040. While the domestic outlook remains largely uncertain, the company's margins appear to be holding up. At nearly a ten-year low, shares trade at a meaningful discount to our revised target price of $49. Crista Huff, Cabot Undervalued Stocks Advisor VanEck Vectors Oil Refiners ETF seeks to replicate the price and yield performance of the MVIS Global Oil Refiners Index, which is a rules-based, modified cap weighted index intended to give investors a means of tracking the overall performance of companies involved in crude oil refining. The International Maritime Organization is mandating the use of either scrubbers or low-sulfur diesel fuels for the world's 39,000 ships and tankers, beginning in January 2020. The purpose of the mandate is to minimize sulfur oxide (SOx) emissions into the atmosphere, and the mandate is nicknamed IMO 2020. IMO 2020 is going to be expensive for businesses that import or export products across the world's oceans, and it's going to be expensive for consumers who purchase those products, but it's going to be a windfall for crude oil refiners. That's because they'll fulfill the demand for low-sulfur diesel fuel and earn good profits from it. Wall Street is projecting 2020 EPS increases of 86% at Marathon Petroleum , 31% at Phillips 66 and 93% at Valero Energy -- the three biggest U.S. holdings within the ETF. If you want to capitalize on the potential share price increases within the global refining industry that could result from their rising profits, the VanEck Vectors Oil Refiners ETF can solve the quandary of which individual oil refining stock to buy. As such, I rate the VanEck Vectors Oil Refiners ETF as a Strong Buy.

Oil Services and Refinery Stocks Deserve a Niche in Your Portfolio

Here are six favorite ideas in the sector.

Columnist Conversation

Trifecta Trades

Tuesday Morning Fibocall for 10/20/2020

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.