Oil Stocks: Are They a Buy?
In November of 1998 the price of crude oil was trading below $20 per barrel. In less than a decade it would climb as high as $159 per barrel. That said, oil stocks tend to move in the same direction with crude oil, offering an alternative to investors who wish to gain exposure to the oil market.
The chart depicts the price of crude oil futures overlaid with the price of the Energy Select SPDR ETF (NYSE: XLE). As you can see, there is a strong correlation between crude oil prices and the price of oil stocks. The Energy Select SPDR ETF is supposed to represent the performance of the energy sector of the S&P 500. It consists of companies in the oil, gas, consumable fuel, energy equipment and services industry.
When oil prices rise so do oil stocks, and the opposite happens when oil prices fall. The price of oil plays a large role in the global economy. For example, if oil prices rise its seen as a hidden tax to consumers. If it costs more to ship and deliver products that will end up costing the consumer more. If consumers are paying more to fill up their cars, they’ll have less disposable income to purchase other goods and services.
The oil sector is not small including several sub-sectors. It includes: exploration and production; integrated oil and gas; oil equipment and services; and pipelines.
Let’s take a look at some of the best oil stocks in each sector.
Best Oil Stocks: Exploration & Production
Oil stocks in this category explore and produce oil, natural gas, and natural gas liquids. It’s often referred to as upstream, and is in the early stages of the oil and gas production process.
Anadarko Petroleum Corporation (NYSE: APC)
Founded in 1959 and headquartered in the state of Texas. As of December 31, 2017, it had about 1.4B barrels of oil equivalent of proved reserves. Its oil and gas properties stretch out to: the U.S. onshore, Algeria, Ghana, Columbia, Gulf of Mexico, and other countries. In addition to is upstream business, it also has a segment that focuses on midstream and marketing.
As of December 31, 2016, the firm operated about 12,700 wells and owned interests in approximately 3,500 non-operated wells in the United States.
A member of the S&P 500, Anadarko is an actively traded oil stock that averages more than 5M shares of daily trading volume. The company rewards investors with a dividend and has plans on increasing it in the future.
Top Oil Stocks: Integrated Oil & Gas
Companies in this sector are involved in the exploration, production, refinement and distribution of oil and gas. Some of the largest companies in the oil and gas space operate as integrated oil and gas firms.
Exxon Mobil Corporation (NYSE: XOM)
The largest publicly traded energy company in the world, Exxon is a member of the Dow Jones Industrial Averages and the S&P 500. The firm has been in business for more than a century and is headquartered in the state of Texas.
Its primary business involves exploring, producing, transporting and selling crude oil and natural gas. Furthermore, it manufactures, transports and sells petroleum products.
The company operates under the following segments: Upstream, Downstream, Chemical, and Corporate Financing. It does business across the globe, including: the United States; Europe; South America; Canada; Africa; Asia; and Australia.
As of December 31, 2017, it had about 25,827 net operated wells with proved reserves of 21.2B oil-equivalent barrels.
Exxon pays its investors an annual dividend of $3.08 per share. Exxon trades 15M shares on average, daily. That’s important if you’re looking for an oil stock to actively day trade, as liquidity is not an issue.
Oil Stocks To Buy: Equipment & Services
Corporations in this category tend to focus on such activities as offshore and deep offshore drilling, onshore drilling, refining, and equipment manufacturing.
Haliburton Company (NYSE: HAL)
Founded nearly a century ago, this Texas-based company is a member of the S&P 500. The company operates through two segments: Completion and Production, and the Drilling and Evaluation segment.
The Completion and Production segment delivers cementing stimulation, intervention, pressure control, specialty chemicals, artificial lift, and completion services.
The Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and wellbore placement solutions.
From 2013 to 2017, the company averaged annual sales of $24.4B. It rewards investors with an annual dividend of $0.72 per share. Haliburton trades 9M shares on average, daily.
Oil Stocks: Pipelines
Part of the energy infrastructure segment. Pipeline companies simply serve as transporters of oil and gas. In other words, the majority of them don’t own the product they are transporting making them less vulnerable to shocks in oil prices. They move the product from the producers and shippers to the market.
Kinder Morgan, Inc. (NYSE: KMI)
Founded in 1936 and based out of the state of Texas, Kinder is a member of the S&P 500.
The company operates through five segments: Natural Gas Pipelines, CO2, Terminals, Products Pipelines and Kinder Morgan Canada.
As of Febrary 5, 2018, the company owned and operated about 85,000 miles of pipelines and 152 terminals. Its pipelines transport natural gas, gasoline, crude oil, and carbon dioxide to name a few.
The firm pays out an annual dividend of $0.50 per share. Its stock price is actively traded, as more than 16M shares trade on average daily.
Oil and gas prices are determined by the forces of supply and demand. However, policy can also play a major factor. In fact, about 81% of the world’s proven crude oil reserves are located in OPEC Member Countries. That said, the group has the ability to heavily control the price of oil by altering how much oil they want to put out into the market.
Paying attention to economics and policy is important if you want to invest in the energy sector. Oil and gas play an important role in the economy. Some of the best oil stocks in the market have been in business for more than 50 years.
As with any investment, make sure to conduct your own due diligence before making any investment decisions. You can do this by sifting through financial reports and other fundamentals. While, studying charts and reading what financial analysts are saying about the company.