Friday, December 19, 2014
Oil stocks are down big over the past few months... and that has many investors looking to buy.
But if you buy the wrong ones, you could lose a lot of money. As we've shown you before, even many giant, well-known oil stocks have more room to fall.
Today, I'll show you several ways to find a safe, stable company in the oil sector. And four stocks that should weather the turbulence in the oil market well...
As regular Growth Stock Wire readers know, oil prices have collapsed. The price of West Texas Intermediate (WTI) crude oil is down nearly 50% from its June high. And the decline in oil prices has destroyed oil stocks.
For example, Bakken producer Continental Resources is down 55% over the past four months. Shale producer Halcón Resources peaked at $7.50 in July. Today it trades near $2.
But as any contrarian trader knows, the best time to buy is when there's "blood in the streets."
Oil is tremendously cyclical. That means its price goes through big cycles of boom and bust. Oil is in "bust" mode right now. But eventually, prices will recover like they always have.
As we've shown you in these pages before, world oil demand will continue to outpace world oil supply in the years ahead. More demand than supply should eventually push oil prices higher again. And when oil recovers, oil stocks will soar.
Investors who buy the right oil stocks today could make big profits in the years ahead.
However, you must be extremely careful if you're going to put money to work in the oil sector today.
The fall in oil prices has left the energy industry in a bad place. Companies used to operating with $100 oil prices suddenly have to find a way to be profitable at nearly half that price.
With oil below $60 a barrel, I expect we will see some U.S. shale producer bankruptcies over the next year.
So if you're looking to invest in safe oil stocks today, where do you start?
First, focus your search on companies that won't go bankrupt.
To do that, you need to look "under the hood," or review their financial statements.
The first thing to look for is a company with little to no debt. If a lender can't call a default, a company can't be forced into bankruptcy.
A business also has to be able to pay everyone it owes money to, not just the bank. I reviewed the financial statement of both U.S. and Canadian energy companies, comparing the cash on these companies' balance sheets to their outstanding liabilities. Liabilities represent any money a company owes, including debt. If a company has more cash than its total liabilities, it's generally not in danger of going bankrupt.
Of nearly 1,000 public energy companies in the U.S. and Canada, just 236 had no debt. When we cut the companies that don't have enough cash to pay all of their liabilities, there are just 139 companies.
This number tells us which oil companies can survive over the next year if oil prices stay low.
But to find out which companies will prosper – despite low oil prices – we have to dig deeper...
I looked for companies that increased their revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) in the past year.
I also sought companies that generated more operating cash than they paid in capital expenditures (a broad measure of how much energy companies spend to upgrade or acquire equipment) last year. Companies that can pay for growth with current operations don't have to borrow money when times get tough.
Finally, I searched for companies that had return on equity (ROE) that was greater than 15%. ROE shows how much profit a company generates with the money shareholders have invested. The higher the number, the better.
The average ROE of the S&P 500 was 14.4% last year. Remember, the S&P 500 tracks blue-chip giants. The average ROE of the broader small-cap Russell 2000 was just 4.9%.
After applying each of these criteria, we were left with just four companies.
In short, the four companies in the table are financially strong enough to stay in business over at least the next year, even if oil prices fall further.
Of the above stocks, World Point and Dorchester are up a bit less than 1% year-to-date. These are great returns considering crude oil's big drop.
Dril-Quip is down the most of the four this year: 34%. That's better than oil, but its fall has brought the stock price to its lowest level since 2008. It's a good value here, but it's the most speculative name on the list.
We own World Point Terminals in the Stansberry Resource Report portfolio.
World Point is a "boring" petroleum storage company with 14 terminals across the country. It will benefit from oil's eventual rebound. And we can collect the company's solid 6.4% dividend while we wait for oil prices to recover.
If you're looking for safe ways to invest in the oil sector, I recommend looking into World Point – and the other companies in our list – today.
There's no guarantee their share prices won't fall if the oil price continues to tumble. But these companies are financially strong... they should be able to weather low oil prices over the next year... and they'll profit when prices eventually go up.
"Oil's price collapse is setting up a big rally in the energy sector," Brian writes. "But it's not in conventional oil producers..." Get all the details here.
Matt Badiali recently shared another low-risk way to invest in natural resources today... "There's one type of gold 'mining' stock up double digits this year," he writes, "and there's more upside ahead..." Find out what it is here.