3 Safe Bets To Brave The Crude Oil Slide
Investors who have pinned their hopes largely on the energy sector were perturbed after oil prices roiled the global equity market yet again. This also marks the steepest one-day fall for crude in over three months. After the recent potholes that crude price has encountered, investors well know that the weakening of the Chinese market and the probable flood of Iranian oil in an over-supplied commodity market have led to the price slump.
Reasons Behind Plunge in Oil Prices
West Texas Intermediate (WTI) crude plunged 8.4% to touch $52.53 a-barrel mark yesterday. To interpret it in another way, we can say that this is the largest one-day percentage of price fall since February and also the lowest level touched by oil since mid-April this year. Before concluding the reason behind the depreciation, we should closely analyze global demand and supply of the commodity.
Demand: At the news front that impacted the world oil demand is the weakening Chinese market. Since June this year, the country’s stock market crashed around 30% which prompted the government to adopt emergency measures. Thus, the global demand for the commodity got affected in a large way as China is the second largest consumer of oil in the world after the U.S.
The worldwide oil demand has also been affected by the strengthening of the U.S dollar following Greece woes. On Sunday, Greece overwhelmingly voted against the austerity package offered by lenders. This poses serious questions about the economic future of the nation and whether it will continue to use the Euro.
Supply: Iran is presently negotiating a nuclear deal with major global powers. If the agreement goes through, all sanctions against the country will be lifted and Iran will work toward stepping up crude export. This spells more trouble as Iran already possesses the world’s fourth biggest oil reserve and the latest agreement will boost oil production further in the oversupplied market. In fact, an Iranian official recently stated that the country is willing to double crude exports after obtaining the necessary go-aheads.
In this regard, it is to be noted that the U.S producers are also willing to ramp up oil production and have already started adding rigs for drilling purposes.
Conclusion: Thus, it is pretty clear from the above discussions that fading oil demand in China and the apprehended Iranian flood in the oversupplied market have dealt a heavy blow to oil prices.
Key Picks
Before we launch into a discussion about the stocks, we would like to clarify that there is no hard and fast rule of staying away from upstream energy players and drillers, particularly when crude price is going downhill. This is because a few of such stocks, though normally avoided under such circumstances, flaunt better fundamentals and add diversity to the portfolio. With two upstream firms and one oil driller stock, we recommend investors to break the norm and focus on the companies’ solid fundaments instead:
Canadian Natural Resources Limited (CNQ - Analyst Report)
Calgary, Alberta-based Canadian Natural Resources boasts an extensive portfolio comprising low-risk exploration and development projects that yield long-term volume growth at above-average rates. The company’s diverse asset base both geographically and product-wise, comprises approximately 33% natural gas and 67% crude oil with the bulk of production located in G8 countries.
Despite the present slump in oil prices, the company’s fundamentals look good as reflected in its current Zacks Rank #1 (Strong Buy), implying that it will significantly outperform the broader U.S. equity market over the next one to three months.
One should also note that the company’s return on equity over the past 12 months is 10.42%, much higher than the industry average of 2.82%.
LRR Energy L.P. (LRE - Snapshot Report)
The company − based in Houston, TX – engages in exploitation, production and development of oil and gas resources, primarily in North America. LRR Energy holds interests in oil rich properties in Permian Basin, Gulf Coast area, Oklahoma and the east Texas region.
Presently, the company sports a Zacks Rank #1. It is to be noted that over the last 60 days, the Zacks Consensus Estimate for the company’s full-year 2015 earnings has been raised 8.3% to 91 cents. LRR Energy also beat our estimates in the last three quarters.
Ocean Rig UDW Inc. (ORIG - Snapshot Report)
Ocean Rig primarily provides oil field services to upstream players engaged in offshore oil & natural gas exploration and production activities. The company specializes in drilling in harsh environments and ultra deep waters. Presently, the firm operates 13 offshore ultra deepwater drilling rigs. Of these, 2 drilling units are ultra deepwater semisubmersibles, while 11 are ultra deepwater drillships.
As of May 4, 2015, Ocean Rig’s total backlog marked a record high of $4.7 billion.
Also, despite unfavorable business conditions for more than a year, the company – boasting a Zacks Rank #1 − surpassed our estimates in three of the last four quarters, with an astounding average surprise of 202.17%.
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