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Best Oil Company Investments


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Best Oil Company Investments | The Only Undervalued Sector in the S&P 500

Best Oil Company Investments

It is time to look at the best oil company investments, as oil prices have come down so far that oil company stocks represent the only stock market sector that is truly undervalued in late 2014, using traditional valuation metrics. While the Standard and Poors 500 (S&P 500) index is up over 13 percent for 2014, oil companies included in the S&P 500 index have lost more than 7 percent during 2014. Much of the losses have occurred since the summer of 2014, as crude oil prices have taken a nosedive from approximately $110 to just under $70 in a matter of months.   However, many oil companies are in good shape despite the drop in oil and their share prices, and present good value in the currently fully valued stock market. Trading with forward-looking Price to Earnings (P/E) ratios that are well below 15, while the broader market trades with an average P/E ratio for 2015 that is above 17.

Best Oil Company Investments | Look For Well Capitalized Companies

Chevron
Some well-capitalized oil companies will survive and thrive during this soft patch in oil prices, while weaker competitors will face liquidity problems and may be subject to being taken over. With the stock market indexes reaching new closing highs and oil companies lagging, due to the steep sell-off in crude oil during the second half of 2014, it is time to consider oil companies that present value with their reduced stock prices. The key is to find oil companies that have the financial strength to survive the current downturn in oil prices and buy them for the eventual turnaround in oil prices, which is bound to happen sooner or later.

Keep in mind that if oil prices continue to fall into 2015, a shake-out in the oil industry is likely, which is all the more reason to find the best oil company investments to survive the shake out by owning the strongest oil companies that will thrive as they buy out weaker competitors. The biggest problem some of the less stabile oil companies have is that they are not well capitalized and have debt to capital ratios that are too high and are unsustainable without enough cash-flow from sales of their oil products. For this reason, invest in oil companies that pay good dividends and have low debt to capital ratios below 20%. This includes the following oil companies.

  • Helmerich & Payne Inc (NYSE: HP)
  • Occidental Petroleum Corporation (NYSE: OXY)
  • Chevron Corporation (NYSE: CVX)
  • Baker Hughes Inc (NYSE: BHI)
  • National Oilwell Varco Inc (NYSE: NOV)
  • Hess Corporation (NYSE: HES)

Big integrated oil companies will survive and thrive the current drop in oil prices. They did great when crude oil was trading for $20 per barrel. There is no reason to think they will not do great if oil is trading for $50 or $70 per barrel. Many of them have balance sheets and revenue streams that will get them through the current drop in oil prices and allow them to snatch up smaller oil companies that are in distress because they are overcapitalized and cannot service their debt.   The big integrated oil companies that will survive and thrive include Exxon Mobil (NYSE:   XOM), Chevron (NYSE: CVX), and Royal Dutch Shell (NYSE: RDSA).

Best Oil Company Investments – Oil Pipeline Companies

Kinder Morgan PipelinesOil pipeline companies, such as Magellan Midstream Partners (NYSE: MMP), Kinder Morgan (NYSE:   KMI), and Spectra Energy Partners (NYSE: SEP), are solid oil plays no matter where crude oil is trading, because they make money from transporting oil, rather than selling it. The cost of transporting oil is not directly related to what crude oil is selling for, and therefore oil pipeline companies are well positioned to continue to do well no matter how oil futures contracts fluctuate.   They pay healthy dividends are relatively stable stocks since their revenue streams are fairly consistent.

Best Oil Company Investments – Consider Funds

If you are more comfortable investing in the oil company companies via funds, consider one of the many Exchange Traded Funds (ETFs) that hold a basket of oil company stocks. Exchange Traded Funds provide a good way to make a broad investment in the oil industry; however, they do not necessarily pick the best oil company investments. Anyone investing in the oil sector using Exchange Traded Funds is investing on the principal that a rising tide lifts all boats. While that saying may not apply to all of the stocks that an oil Exchange Traded Fund holds, if oil prices recover, Exchange Traded Funds that focus on the oil industry should rise as well, since the majority of the companies that they hold will likely rise with rising oil prices.

The following are some oil sector Exchange Traded Funds to consider.

  • Energy Select Sector SPDR ETF (NYSE: XLE)
  • iPath S&P GSCI Crude Oil TR ETN (NYSE: OIL)
  • SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP)
  • iShares Dow Jones US Oil & Gas Exploration & Production Index Fund (NYSE: IEO)
  • PowerShares Dynamic Energy Exploration & Production Portfolio (NYSE: PXE)

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