Oil Prices: Where They’re Going and How to Profit From Them
There is so much supply out there, oil prices could very well experience another material price correction, making the business case for producers extremely limiting.
One thing that isn’t plentiful in this stock market is value. But it has appeared in the energy sector as both oil prices and natural gas are subdued.
For the longer-term investor interested in exposure to the energy sector, now is the time for perusing possible picks.
Naturally, resource investing is a high-risk strategy. Anything related to resources and commodities is subject to the inherent volatility, unpredictability, and supply/demand equation that is constantly changing.
But getting the cycle right can pay off handsomely. This is well illustrated by the decade-long strength in gold prices up until 2011. With a change in the interest rate cycle likely in the near term, my outlook for gold-related investments is negative.
Are Oil Prices Ready to Strengthen?
It’s a different story with oil. It’s the one commodity that’s pervasive in life, whether we like it or not.
I find making predictions regarding securities prices to be a virtually useless endeavor. But it would seem that the marketplace is content to have oil prices where they are for a while. I don’t think it’s reasonable to expect oil prices to suddenly just take off tomorrow considering the domestic supply situation and Middle East production desiring to keep hold of its global market share.
Also Read: The Winners and Losers of Dropping Oil Prices
Is There Value in the Energy Sector Now?
I believe there is value here; and it’s an attractive sector given the commodity price correction. However, I would add that resource investing is, for the most part, not investment-grade.
One example of a company that I believe makes for an attractive holding for the next several years is Kinder Morgan, Inc. (NYSE/KMI), with its substantial pipeline and storage business combined with a strong dividend growth outlook. This would be considered an investment-grade equity security, but its share price still moves on the underlying spot price of oil. And this won’t change for either big or little oil.
ConocoPhillips (NYSE/COP) is much more attractive now. The stock recently bounced off its 52-week low. Its dividend yield has now crept up to 4.5% and its valuation is reasonable. This is another large-cap energy producer worthy of attention due to its share price correction.
In the small-cap space, Synergy Resources Corporation (NYSE/SYRG) has been holding up considerably better on the stock market than its peer group and has done so for a reason; the company is still growing and institutional investors still like the stock. This is a position that’s ripe for a buyout.
I still like The Greenbrier Companies, Inc. (NYSE/GBX), which manufactures oil railcars among other items. (See “Oil Prices Down: Top 3 Stocks to Profit From This.”) New safety guidelines were just finalized in the U.S. and Canada regarding the transportation of flammable liquids by rail. Greenbrier is already delivering more robust tank cars and can retrofit existing units as well. The company’s business prospects remain solid.
So, there is value in the oil patch for equity market investors. The price of the commodity is unlikely to move dramatically higher anytime soon unless there’s some sort of shock to the marketplace.
Up until recently, the energy sector was fully, if not expensively, priced on the stock market. With correction comes medium- to longer-term opportunity.
