The oil sector is as volatile one there is. There are so many factors that come into play with oil stocks, like the economy, OPEC, taxes, green energy, and more that it is hard to gauge just how the energy sector will perform in a given year. Look at the past few years as a perfect example of this.
In 2014 and 2015, the sector was a loser, returning a negative 9% and 21% return in each year. During this time, they trailed all of the other sectors in the market. Then came 2016, when energy returned 28%, easily catapulting it to the best sector on Wall Street.
What does 2017 hold in store? To be frank, the answer is uncertainty. Traders have been expecting looser regulation on drillers but at the same time, the potential for new taxes and tariffs on imports. Add to this the attempt by OPEC to limit supply and raise pricing, and we have no idea exactly where oil is headed.
So how do you invest oil stocks during times of uncertainty? You pick the best of the bunch and limit your downside losses. In this post, we will help you to identify the best oil stocks of the group to invest in. Your job will be to set up stops to avoid any major losses should any new policy have a negative effect on the market.
5 Oil Stocks You Should Buy
#1. Exxon Mobil (NYSE: XOM)
You have to start a list with the very best oil stocks and that is where Exxon comes into play. When other oil companies were losing money when oil prices dropped and had to cut dividends, Exxon didn’t blink an eye. They not only remained profitable, but continued to increase their dividend.
The reason Exxon remains successful while other companies falter with low oil prices is because Exxon is integrated in such a way that allows the company to thrive regardless of the price of oil.
Currently, Exxon plans to increase spending 16% year over year through 2020 and spent $25 billion annually on capital and exploration during this time as well. The future remains bright for Exxon as they continue to invest in projects that both provide short-term and long-term revenue streams.
As long as the price of oil stays steady or rises, Exxon stock should perform nicely for investors.
#2. EOG Resources (NYSE: EOG)
When energy prices tumbled a few years ago, many oil companies were hit hard. Many lost income streams and a handful had to slash their dividend. EOG Resources took note of the carnage and went to work. They devised a plan for how the company can remain profitable during times of low energy prices.
By putting all of their efforts into improving efficiency, innovating new processes and taking advantage of new technology, EOG has set the bar for remaining profitable when energy prices tumble. They tout that with oil at $40 per barrel, they can see an after-tax rate of return of 30%. As oil prices climb higher, so do profits.
The business of EOG is producing oil through its vast network of owned wells. And thanks to improving their business approach the last 2 years, they are expected to grow by 15% annually through 2020. This assumes oil holds steady at $50 a barrel.
Unfortunately, many investors have already got wind of EOG. You best option is to look for a pullback as entry point and then ride along.
#3. Enbridge (NYSE: ENB)
While the first two oil stocks were about oil production and refining, Enbridge plays a different role. They are an oil pipeline company. By doing a pipeline play, you can weed out some of the volatility that presents itself with producing and refining oil. After all, regardless of the price of oil, it still needs pipeline to be moved from place to place.
Enbridge gets top honors here for a couple of reasons. First, they recently did a handful of acquisitions to help grow the business. In addition, they are working on $20 billion worth of fee based projects. Because of this, they anticipate increasing their dividend by 15% in 2017 and another 10-12% growth in the dividend through 2019.
Since the start of the year, Enbridge has been trading in a small window so now could be a good time to get in on this stock.
#4. Core Labs (NYSE: CLB)
As with Enbridge above, Core Labs is a different play on the energy sector. Core Labs is more of a technology company that offers services that help energy companies, mainly oil and gas, to get the most out of their reservoirs.
They help oil companies by taking samples and estimating the amount of oil in reservoirs and help in increasing the production and recovery of the oil in those reservoirs.
While earnings growth for Core Labs recently haven’t been great, you have to dig deeper to see why this stock is a good investment. The main reason is the quality of earnings the company produces. In other words, they have much higher margins than competitors. As the oil drilling industry rebounds, Core Labs is going to be able to add a lot more to its bottom line without having to increase revenues all that much. Ideally, revenue will jump, but even if it doesn’t, the company will turn a healthy profit.
As with Enbridge above, this stock is also trading in a narrow window and could be the right time to get in and start collecting the dividend.
#5. BP plc (NYSE: BP)
Many are familiar with BP after the major oil spill in the gulf coast of the United States back in 2010. The company ended up paying out close to $54 billion because of that disaster. Since then, oil prices have fallen, creating another obstacle for BP to overcome.
Their response to both has been to shift its focus to clean, renewable energy sources. BP has been acquiring other firms in this industry to help its bottom line grow. Still many analysts are instructing investors to steer clear of BP as they are selling off some of their most profitable properties as part of the agreement to end litigation related to the oil spill.
Still, the company pays close to a 7% dividend and if the new clean energy businesses can help to support the bottom line, this is a stock to own since most everyone is ignoring it.
The stock has pulled back from its high at the beginning of 2017 and now is a good time to gain exposure.
Final Thoughts
The energy sector is a complicated one. You have drillers and refiners, all who are impacted separately in some cases but the same in other cases. And with the global climate always changing, the byproduct is a volatile energy sector.
While volatility can be bad at times, it also tends to lead to overselling, which means you can get a good deal on oil stocks if you pay attention and are quick to act. Seeing as how the companies highlighted above are industry leaders, the opportunity to buy during oversold times is rare, so it is important you set alerts for price targets and get in when it makes sense for you.
Just be certain that when you get in, you set stops and limits so that you can just as quickly get out should large pullbacks occur.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.
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