It’s pretty amazing that oil prices were averaging about $100.00 a barrel for West Texas Intermediate (WTI) from 2011 to the middle of 2014, after which they all of a sudden collapsed.
The run-up in the price of oil in 2008 was pretty spectacular too; only to be outdone by its subsequent collapse to a price not too far from where they are now.
It certainly seems reasonable not to value oil price predictions. Conspiracy theories are still abound as to how oil all of a sudden took a nosedive last year, especially considering the supply glut was old news.
Perhaps it’s the fickleness of financial markets where the flow of capital moves emotionally and with a herd mentality. In any case, it’s much more difficult for producers to make money. And the same goes for investors. Bakken oil no longer commands premium share prices. The energy patch is now a value trade.
What to Buy with Oil Prices Stuck in Correction
For the investment risk inherent in resource-related investing, I think the best risk-adjusted bang for your buck in oil is with large-caps. Previously in these pages, we’ve considered Kinder Morgan, Inc. (NYSE/KMI) with frequency.
In an equity market that’s already gone up in a slow (or no) growth world, dividend income from the oil patch is perhaps the best play.
There is value among some very well-managed domestic producers, but the business model with pure play resource businesses lives and dies with spot prices.
The Most Attractive Part of the Energy Patch Now
KMI is yielding right around five percent currently; with ConocoPhillips (NYSE/COP) and Chevron Corporation (NYSE/CVX) close to it.
With capital expenditures on the chopping block among many oil and natural gas producers, energy service is a sector to avoid.
There are attractive junior producers that are now no longer expensively priced. (See “3 Micro-Cap Stocks to Watch Amidst Global Uncertainty.”) These are stock market turnaround opportunities for right now.
But in this market, I still view dividend income as perhaps the most important in terms of expected return. The stock market has already gone up and cycles are about to change.
A KMI or COP actually may be even more attractive than non-energy dividend-paying blue chips because oil prices have experienced their big price correction. Any uptick in the price of oil will translate right to the bottom line.
Sector wise, energy is more attractive now because prices corrected. It’s going to take a while for a new trend to develop but oil prices have proven their cyclical volatility over time.
As with other portfolio choices available to equity investors, there’s no rush to be buying oil with the broader market stuck in consolidation.
But in terms of portfolio diversification, some exposure to energy makes sense. And the current environment is a good time to be perusing the sector.
Oil prices aren’t just a reflection of global supply and demand; they are also a barometer on equity market investor sentiment, which doesn’t say much currently.
Large-cap, dividend-paying energy is now a defensive sector. The current environment is opportune, especially for income-seeking investors.