E HH Is It Time To Buy Oil Companies Again?

If it isn’t, it’s certainly a good place to begin nibbling… Oil prices may take yet another dip and take oil and gas stocks down with them.  I hope so – I want to buy much more than the small amount I own today.  Knowing that we cannot possibly catch the exact highs or exact lows, in times of market over-exuberance if there is a quality sector providing an essential product that has already been in its own private bear market hell, it is likely the best place to begin our search for value. 

Three oil and gas top-tier firms come immediately to mind: Royal Dutch Shell (we prefer the RDS-B shares), Total Petroleum (TOT,) and BP.  That’s not to disparage their even larger brethren, Exxon Mobil (XOM) and Chevron (CVX), but those two have not fallen as much.  If they should, they’ll be on our buy list as well.  (When I discuss big oil, I don’t include any Russian or Chinese firms which are de facto state-owned or oligarch-owned.)

The benefit of sticking with these major integrated energy firms is that we have virtually zero risk of default or bankruptcy.  No matter how low oil prices tumble, their diversification into both upstream (exploration and production) and downstream (refining and distribution/retail sales) keeps them in good stead.  When oil and gas prices are high, they make the most money, of course.  But even when prices of the commodity itself are low, that just reduces the big integrated firms’ cost of feedstock for their refineries and chemicals and plastics businesses.

I’ve done the math and, assuming the dividends of these giants aren’t cut, they look pretty good in any scenario.  If the market continues to leap ahead this year, it’s likely these companies will be carried along with the general euphoria, and with considerably less volatility than most other stocks along the way.  If the market is flat, they’ll likely stay roughly where they are (though a serious elevator shaft drop in oil prices would force us to remind ourselves daily that these are long-term investments!)  And if the market is down but oil doesn’t plunge to Citicorp’s (C) projection of $20 a barrel, they will bump along but, paying us more than 5.5% each to stick with them, give us a nice cushion against a 10% or so correction.

Let’s take a look at each of these three favorites of mine, then briefly mention the next tier down:

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Disclosure: The author is long TOT, STO, BP and RDS-B. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. ...

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J Town 5 years ago Member's comment

Since mid May, oil has continued to be a volatile ride with ups and downs. If the Iran nuclear deal is approved by Congress, we can surely see further steep declines in oil as millions of extra barrels of oil are released into the global market once the US embargo is lifted. Further declines in oil will also most likely lead to further declines in oil stocks. Total, and RDS-B are both down about 10% since May along with the other big names. A better bet perhaps are oil refining companies who benefit when oil prices drop. One good example and a Buffett pick is PSX. Yesterday, it jumped over 3% reaching a high of 84.24 and is now trading within reach of its 52 week high.

Joseph Shaefer 5 years ago Author's comment

Thanks, J Town. FYI, we recommended MPC and VLO as our choices among the refiners. And we still like the big integrateds. Nothing is certain with the Iran deal once Congress and now-snubbed US allies in the Gulf weigh in...

J Town 5 years ago Member's comment

Surprisingly oil seems to be in the positive today up about 0.5%, and oil stock Exxi was up over 5% today. What gives?

J Town 5 years ago Member's comment

You think Congress will see it through?

Joseph Shaefer 5 years ago Author's comment

Speaking from my bias as a geopolitical analyst rather than portfolio manager, I certainly hope not. Enriching a government sworn to destroy Western civilization is hardly the coup the administration has painted. Bring them into the family of nations? Wishful thinking. Expect the first lifted-sanctions windfall to go straight to Hizbollah...

Karl Yong 5 years ago Member's comment

I share your view, I am heavy into energy sector in XOM, CVX and RDSA.L. This is for long term investment/hold, my view, despite overall oil over supply in the market, I serious doubt this scenario will last:-

1) Major suppliers are hurting badly. Russia, Saudi and other suppliers are eating into their reserves at price below $60-80.

2) China, since the last 15 years, energy has always remain a critical issue to them, despite after building a mega hydro-dam and multiple nuclear power stations. Numerous of my chinese suppliers are still running their generators for their factories 2-3 times a week, simply till today there still insufficient supply. The recent turn of events and US international policies, had enable China to gain Russia and winning over Saudi.

3) I believe China growth has always limit by the shortage of energy, plenty of cheap labor (even cheaper than Vietnam) outside China's major industrial areas and major cities. Now China harbored the intention to build a super high speed train to the west(Europe) and to south(Singapore), armed with AIIB.

4) The best is Obama's oil policy seem to be driving Middle East countries to war rather than the peace policy he preached about.

In term of oil and commodities, if not because of present oil price war, oil giant like XOM, CVX and others at present price? I totally agreed with your assessment, oil stock is great for investment play at present price, not great for trade or short. More for longer term play. Oil is critical to keep the world moving but at the ever increasing rate of consumption, it is good equities to invest in.

Joseph Shaefer 5 years ago Author's comment

I consider oil and gas to be Nature's Batteries, compacted long ago to be used wisely until we can make the transition to renewables...

Karl Yong 5 years ago Member's comment

Agreed, however the rate the increase in demand is scary.

Joe Economy 5 years ago Member's comment

I agree there is possibly considerable upside gains in the energy sector. However, you mentioned investing in TOT, XOM, and others because of their high dividends of around 5% in order to offfset possible future losses. If its dividends you want, there are plenty of stocks out there with vastly greater dividends with less volatility than oil. I found the following (dividends in parens) Tribune Media TRCO (49.94%), Sand Ridge Permian Trust PER (30.20%), Chesapeake Granite Wash Trust CHKR (22%), and Cornerstone Progressive Return CFP (22%)

Joseph Shaefer 5 years ago Author's comment

Hi Joe E,

Yes, dividends are nice but I want them as icing on the cake. I seek companies that are likely to increase their dividends as their businesses grow. Regrettably, in my analysis the four you mention look most likely to slash their (what I consider, reviewing their fundamentals) unsustainable dividends rather than increase them!