Oil prices recovered on Friday after a report from the International Energy Agency (IEA) and forecasts from leading financial institutions indicated that prices may have bottomed out. This follows a steady recovery in oil prices from their late January lows. Since then, oil prices have rallied nearly 45% to hover around the $40 mark.  

Other data suggests that the calm may be short-lived and volatility would continue to plague oil. However, the evidence is largely in favor of a gradual recovery in prices. Given these factors, picking dividend yielding value stocks from the sector would be a prudent option.

IEA Sees Prices Bottoming Out

On Friday, the IEA said that though oil may continue to traverse rough waters going forward, prices may have hit their lowest levels. According to the IEA, the removal of sanctions on Iran and its subsequent comeback as an oil exporter did not have as much an impact as was estimated earlier. The IEA said that Iran’s production increased by 220,000 barrels per day (bpd) in February and the country will only gradually emerge as a factor to reckon with.

The agency also said U.S. crude production is expected to fall by almost 530,000 this year, to 12.4 million bpd. Additionally, the IEA revealed that non-OPEC output declined by 90,000 bpd in the prior month to 57.1 million bpd and is projected to fall further this year. Output is expected to decline by 750,000 bpd in 2016, higher than the previous estimate of 600,000 bpd.

The agency stated that OPEC's crude output decreased by 90,000 bpd in February to 32.61 million bpd following decline in production in the United Arab Emirates, Nigeria and Iraq. Additionally, the IEA said rising possibilities of an agreement between major oil producing nations to cap production will also support higher prices.

Goldman Sachs, Morgan Stanley Concur

Meanwhile, financial institutions The Goldman Sachs Group, Inc. (GS - Analyst Report) and Morgan Stanley (MS - Analyst Report) have also adopted a positive stance on oil. According to a Goldman Sachs note, oil prices may have bottomed out after hitting their lowest point in 12 years in 2016. Goldman Sachs expects crude price to vary between $25–$45 per barrel during the second quarter, higher than first quarter’s range of $20–$40.

According to the financial behemoth, crude price is likely to stay near $40 a barrel over the third and fourth quarters of 2016. Morgan Stanley has taken a similar position on the sector’s prospects. The financial institution concurred with the view that prices had hit their lowest. However, it believes that price growth will continue to remain low for the rest of the year before trending upward in 2016.

Oversupply Concerns Linger

A section of analysts have opined that crude had possibly achieved some stability. Further, Baker Hughes (BHI -Analyst Report) reported that the total number of U.S. oil rigs decreased by 6 to 386 for the week ending March 11, its lowest level since 2009.  This is the 12th consecutive week of a declining rig count.

However, Goldman Sachs remains worried about a continuing supply glut. Even now, nearly a million barrels of crude are produced per day over and above current demand. This factor itself could push prices lower. Additionally, the rise in prices could lead to a hike in production which could once again lead to a demand supply mismatch. Meanwhile, Iran continues to shy away from production freeze talks which could spell trouble for prices in the days to come.

Our Choices

Data from the IEA and forecasts from leading financial institutions clearly indicate that oil prices have bottomed. Further, prices are likely to recover over the year and may have already attained a certain degree of stability.

However, given the headwinds the sector continues to face, picking the right stocks is crucial when it comes to making investments from the sector. Value stocks offering good dividends make for an excellent choice in the current scenario. Our selection is also backed by a good Zacks Value Score and Zacks Rank.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.

Sprague Resources LP (SRLP - Snapshot Report) purchases, stores, distributes and sells petroleum products and natural gas in the U.S.

Sprague Resources holds a Zacks Rank #2 and has a Value Style Score of ‘A.' The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 6.37, lower than the industry average of 18.41. The stock has a dividend yield of nearly 11%.

CypressEnergy Partners, L.P. (CELP - Snapshot Report) is a provider of saltwater disposal and related environmental services to energy companies.

Cypress Energy Partners has a Zacks Rank #2 and has a Value Style Score of ‘A.’ It has a P/E (F1) of 10.15, lower than the industry average of 18.50. The company has a dividend yield of 18%.

Seadrill Partners LLC (SDLP - Snapshot Report) is an owner, operator and acquirer of offshore drilling units.

Seadrill Partners holds a Zacks Rank #2 and has a Value Style Score of ‘A.’ It has a P/E (F1) of 0.90, lower than the industry average of 4.73. The company has a dividend yield of 27.6%.

Vanguard Natural Resources, LLC (VNR - Snapshot Report) is an acquirer and developer of oil and natural gas assets in the U.S.

Vanguard Natural Resources holds a Zacks Rank #1 and has a Value Style Score of ‘B.’ The stock has a P/E (F1) of 15.91x, compared to the industry average of 43.74. The stock has a dividend yield of 15.6%.