Oil and Natural Gas, Let’s Up the Ante!

Despite oil’s recent rebound off of multi-year lows, it’s still very low from a historical standpoint. The same can be said for natural gas. And while I don’t expect either to shoot up from here, I am of the opinion that oil has bottomed. I’m not quite as confident about natural gas, but it’s pretty darn low. I would like to take this opportunity to admit that my opinion shouldn’t carry a whole lot of weight, but there it is.

I’m currently exposed to these commodities through my investments in Chesapeake Energy (NYSE: CHK) (which is going poorly) and Energy Transfer Equity (NYSE: ETE) (which is doing quite well). I’m seeking more exposure, with the realization that pain might come before pleasure. Listed below are 3 companies that I believe will be long term winners.

ConocoPhillips (NYSE: COP) is a major independent oil and gas company with around 50 billion in market cap. They are very exposed to the price of oil and natural gas, each making up around 40% of revenue.

The big news out of COP recently is all about the dividend. It was 74 cents, and is now 25 cents. This caused quite a stir, as management vigorously defended their commitment to the dividend for a long time… right up until the point they slashed the heck out of it a few months ago. Many feel that the move should have been telegraphed beforehand, but it seems to me the cut itself was obviously needed given the environment. While COP’s balance sheet is better than many of its peers, it could use a little boost. The savings from the cut will help the balance sheet quite a bit, especially if they find themselves needing to borrow cash in the future.

I have a limit order to start a position in at $35 dollars. As I write this, it last traded at $40.08, with a low of $31.05 about a month and a half ago.

Occidental Petroleum Corporation (NYSE: OXY) has weathered the current commodity storm better than most independent oil and gas companies. This comes from a balance sheet that contains very little leverage compared to the vast majority of its peers. OXY also has over $4 billion in cold, hard cash. That’s a good position to be in, especially if things get worse and other companies are forced sell more assets at fire sale prices. Also, consensus is that the company won’t have to cut its dividend, currently yielding almost 4.5%.

One reason the company has this cash is that it’s been selling non-core assets to focus on better quality, better price-point assets. That’s a pretty common thing to hear in the industry today, but compare OXY’s balance sheet to others saying this.

In addition to being exposed to oil and natural gas, Occidental also has a segment that manufactures and markets basic chemicals such as caustic soda, vinyl, polyvinyl, sodium silicates, and many others. So there’s a little diversification there as well.

I have a limit order in to start a position at $63.75, a bit above the low of $58.24.

My next pick is an oil services company, Baker Hughes (NYSE: BHI). BHI is the third largest oilfield service provider out there. They sell equipment and services to exploration and production companies, such as my 2 picks above. The downturn in oil has hurt this group, because lower E&P CapEx spending directly affects their revenue.

The big news with BHI is that they are being bought by Halliburton (NYSE: HAL), the world’s second largest oil services company. I originally started looking into Halliburton, expecting to buy it, but looking over the terms of the deal I’ve come to the conclusion that Baker Hughes is the way to go. If the deal goes through, each share of BHI will get $19, plus 1.12 shares of Halliburton. So if it goes through, I’ll end up owning HAL anyway, plus a little extra cash. Of course this all depends on where stock prices are at the time, I guess. What do I know about mergers and such? Not much, honestly.

But US and EU regulators seem to be giving HAL a hard time. The deal might not go through. And if that happens, it seems to me that HAL will take a bigger hit than BHI, and HAL will owe BHI a $3.5 billion fee, even if the deal is blocked by regulators. BHI already has a very strong balance sheet. It seems to me that the market is pricing BHI as though the deal won’t go through, meaning that if it does, there could be some real upside here. The key is that I would like to own BHI whether or not the deal goes through.

I have a limit order for BHI placed at $41.50, just below the $43.37 where it is trading as I write this.

I am well aware of the risks involved in owning stocks that depend on the price of oil.

While each company has issues of its own, the driving factor in each is a relatively strong balance sheet. These names seem nowhere near as risky as my investment in Chesapeake, but I understand that they will not skyrocket higher simply because they come down a few percent to my buy points. I will be cautions and continue to buy them on weakness if the opportunity becomes available. Risky, yes, but look at the charts; the time to buy them wasn’t when oil was trading above $120.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLIAMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

Is Intel Right for My Portfolio?

 

First of all, I wanted to call this article ‘Intel Inside… My Portfolio’, but that’s probably been done already. So why am I looking at Intel? On the surface, Intel is way less sexy than anything else I’ve talked about. Intel Corporation (NASDAQ: INTC) is a HUGE, OLD monolith of a company that doesn’t seem to make very large moves over short periods of time. Sure it’s a technology company, but it’s old tech. Can you think of a less interesting old tech name? I mean, this thing is part of the DOW for goodness sake.

Perhaps most surprising, for me, is that it isn’t a heavily beaten down name. People who bought it in the mid to high $30’s in late 2014 might disagree with me on that, but for me, the decline isn’t all that appealing. As I write this it’s almost $32 with a 52-week high at $35.59.

So why am I interested in this stodgy name? The last couple of weeks my portfolio has been whipped around a lot. I’ve gone from over $700 in the hole, to just under $700 in profit. As I write this, Sunday March 13, I’m up a bit under $200. My oil and natural gas investments are, perhaps, starting to move in the right direction. I’m not scared of some volatility, especially since up until now I’ve been in the red almost constantly, but I think I could use a steady name to help balance things out a little. Also, while the potential to make a huge amount of money in INTC in a reasonable amount of time is very limited, a little over half my account is currently in cash. If I can get even a modest return out of Intel, why not? As with anything, it all depends on where you buy. More on that later.

So what’s going on at Intel? They are still the leader in desktop CPUs. That’s been the case for a long time, and it seems like that won’t change anytime soon. The problem is that PC sales are in decline, and have been for awhile. More and more people compute via smart phones or something else that is easily carried around. Personally, I like a nice clunky desktop, and plan on buying one in the next several months. Mine is ancient. But I only got a smart phone less than a year ago, so maybe I’m not your average user.

So does Intel have a significant piece of the mobile game? I honestly couldn’t tell you. From what I’ve read, some people are bullish on Intel’s current mobile business, while some people think they’ve dropped the ball. There are rumors that Intel is going to be inside many of the upcoming iPhone 7’s. Then there are people who laugh at those rumors. So what do I know? I get the feeling that Intel isn’t strong in the smart phone biz.

So how does Intel intend to grow? The big thing here is their Data Center Group, which grew 11% last year. The DCG basically makes chips for cloud servers and network infrastructure in general. Companies like Google (Alphabet? Whatever) are huge buyers of these chips. Qualcomm (NASDAQ: QCOM) is trying to get into this business, and there are rumors that they might win Google as a client. So there is risk, but from what I understand, Intel has a significantly better product.

Another growth factor is NAND flash memory. This business grew 20% last year. I’d love to talk more about NAND flash memory, but I’m limited on space and knowledge of what exactly NAND flash memory is. But it’s growing, YAY!

Another growth area is the Internet of Things (IoT). I’ve heard the ‘Internet of Things’ phrase thrown around a lot, but I never really took the time to look it up and understand what it actually means. Apparently in a few years everything will be connected to the internet. Light bulbs, cars, appliances, underwear, you name it. Billions upon billions of devices, and Intel wants a piece of it. They’re helping to develop 5G connectivity to facilitate this, and they want their chips in these devices. They may have missed out on phones, but they want in everything else. This business grew 7% last year.

There are a lot of moving parts to this company. In 2011 Intel bought McAfee and changed it to Intel Security. They recently bought Altera, an acquisition that should strengthen their IoT and DCG businesses. They are trying to get into the augmented reality business, the drone connectivity/collision avoidance business, and the 3D video business. I don’t know how any of this will work out for them, but at least I can tell they are trying to innovate as opposed to simply churn out CPU’s and hope for the best.

I’d like to expand on their work with drones. AT&T (NYSE: T) and Intel are working together to improve drone utility. Their focus is high altitude and beyond-line-of-sight capabilities. This has obvious implications to companies like Amazon (NASDAQ: AMZN) but that’s not all. Think of the other possible applications where these aspects would be important. A bartender friend of mine (thanks Vernon) pointed me to an article at DRI (Desert Research Institute) about cloud seeding via drones. Drones might be used for all sorts of things if the technology improves. If Intel can get a piece of that business, so much the better. Check out the article:

Desert Research Institute

While the article has nothing to do with Intel directly, it illustrates one of the many non-recreational uses that could benefit from what Intel is currently working on.

Intel has a strong balance sheet, and a nice dividend of around 3.5%. The dividend seems interesting to me. They have a decent history of raising it, and they only pay out around 40% of their earnings. So not only does it seem safe, it seems that there is room for it to grow. The more I learn about investing, the more I like dividends.

So how do I plan on starting a position in Intel? Just jump right in? No no no… Intel is around the middle of a 2 year trading range at the moment. I’m not super anxious to own it. I’m basically initiating coverage of the company. That’s official Wall-Street speak for ‘I’m going to keep an eye on it’. If I get some real weakness and still like the story, I’ll act. The market averages are showing some weakness, and if there’s a major correction over the next several months, Intel might be a good company to load up on long term.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender