After a 2½ year bear market, the rig counts - both U.S. and International - have bottomed and activity is starting to bounce off slowly. Both oil and natural gas have rebounded from their multi-year lows reached earlier in 2016 and while the commodities may not be at levels many thought they would be at the end of the year, even at today's prices certain companies are in a position to earn profits.
True, the energy market faces many uncertainties and it may not be time to buy stocks indiscriminately, but these players look like pretty compelling investments.
Oil E&P Stocks Catch Wave of Optimism
The deal by members of the OPEC oil cartel to cut output is expected to bring much needed stability to the market with prices set to improve steadily. Multinational oil enterprises, on the back of greater certainty, will now be able revive spending on drilling activities.
While all crude-focused stocks stand to gain from the OPEC-driven oil rally, companies in the exploration and production (E&P) sector are the best placed, as they will be able to extract more value for their products.
Moreover, the firms boast of a conservative balance sheet with enough cash on hand and manageable leverage. This provides them ample flexibility to make acquisitions or grow internally. Moreover, driven by operational efficiencies, these entities have been able to reduce unit costs -- an impressive achievement amid the low realization scenario.
Apart from Zacks Rank #1 (Strong Buy) Diamondback Energy Inc. (FANG), we advocate the likes of Matador Resources Co. (MTDR) and Newfield Exploration Co. (NFX). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
MLPs Offer an Attractive Choice
The Master Limited Partnership (MLP) business model looked like a goner earlier this year. As oil prices plummeted to a 13-year low in Feb, the Alerian MLP index dived 30% in just five weeks. However, market sentiment has improved considerably thereafter.
The major advantage of the MLP is that the assets that these partnerships own - oil and natural gas pipelines and storage facilities - are largely run on volumes, not prices. This implies that the firms get remuneration to transport the same volumes irrespective of the price of the commodity.
Given the current weaknesses in petroleum stocks, MLPs are probably the best method of investing in the sector. They also offer liquidity and tax benefits, which add to their appeal. This is why these stocks would make good additions to your portfolio.
With capital market access remaining tough for most sector components, we suggest buying stocks with clean balance sheets. Our picks would include the likes of Archrock Partners L.P. (APLP), CONE Midstream Partners L.P. (CNNX) and TC PipeLines L.P. (TCP).
Safe Bet on Integrated Majors
In this current turbulent market environment, we advocate the relatively low-risk energy conglomerate business structures of the large-cap integrateds, with their fortress-like balance sheets, ample free cash flows even in a low oil price environment and steady dividends. These companies continue to benefit from their scale and diversification that result in the strongest returns on capital in the industry.
Thanks to their integrated structures, entities like Royal Dutch Shell plc (RDS.A), Chevron Corp. (CVX) and Eni SpA (E) have been able to withstand plunging oil prices better than the rest and protect their top and bottom lines to a certain extent.
The companies' financial flexibility and strong balance sheet provide them with a larger war chest to draw upon in this highly-uncertain period for the economy. Most of them remain in excellent financial health, with ample cash on hand and investment-grade credit ratings with a manageable debt-to-capitalization ratio. On top of this, managements have established quite a track record of conservative capital management and cash returns to shareholders. They also pay a safe dividend, yielding attractive returns.
While all of them have suffered from the crude carnage over the past few years, holding on to them can still prove to be an astute move. Moreover, large integrated companies - unlike their small or medium-sized producers - are not known to hedge a major share of their future production. So, they are more likely to benefit from the OPEC-driven higher spot prices.
Check out our latest Oil & Gas Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy.
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