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.
Michael, the Stock Picking Bartender,