3 Best Stocks to Buy for Soaring Oil Prices

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Oil prices rose on Thursday to fresh 2015 highs, taking energy stocks with them. A number of catalysts helped to spark the rally, but much of the gains were driven by recent supply numbers that came in lighter than analysts expected.

The 3 Best Stocks to Buy For Soaring Oil Prices

Although crude oil inventories remain at historical highs, supply isn’t growing by leaps and bounds like many expected. For the week ended April 24, inventories increased by 1.9 million barrels, the second-lowest supply increase in the last four months.

It doesn’t hurt the bullish case for oil prices that the U.S. dollar has been retreating from elevated levels. Commodities prices are denominated in dollars, so when the greenback loses value, it generally takes more of them to buy a barrel of oil or an ounce of gold.

With crude oil still more than 40% off its 52-week high, there’s still plenty of room to run.

Let’s look at the three best stocks to buy for rising oil prices:

Best Stocks to Buy for Soaring Oil Prices: Noble Corp (NE)

YTD Return: +8.8%

Best Stocks to Buy for Soaring Oil Prices Noble Corp NE stock

Noble Corp plc (NYSE:NE) is routinely one of the stocks most sensitive to swings in oil prices. Since oil’s peak last June at $98 a barrel, NE stock lost 48% as oil fell 40%. The promise of a rebound was a major impetus behind SlingShot Trader editors John Jagerson and S. Wade Hansen‘s decision to pick NE stock as their pick in the Best Stocks for 2015 competition.

In their most recent update on their pick, they explained why they thought NE remained one of the best stocks to buy for a rebound in oil prices:

“Unlike many of the shale companies in the U.S. that operate as highly leveraged partnerships or regular C-corps, Noble Corp still has an attractive capital position. That means NE stock missed out on some of the speculative windfall over the last few years, but it also means that it can afford to swoop in and ramp up production when energy prices start to recover.”

At a market capitalization just below $4 billion, Noble’s the smallest company on today’s list, but not small enough to pose huge risks. And after Noble posted a blowout first-quarter earnings and revenue beat on Wednesday, it looks even more attractive.

Oh, I almost forgot to mention: Noble stock pays an eye-popping 8.7% dividend. Not bad, huh?

Best Stocks to Buy for Soaring Oil Prices: Transocean (RIG)

Best Stocks to Buy for Soaring Oil Prices: Transocean ltd RIG stockYTD Return: +3%

Remember how Noble stock fell 48% versus a 40% decline in oil prices? Well Transocean LTD (NYSE:RIG) fell 58% in that time. It may seem a little odd to brag about the underperformance of any given investment, but it illustrates the highly volatile nature of RIG stock — and just how sensitive its stock price is to oil prices.

It’s not unusual to see Transocean stock make a 3% swing for each percentage point change in oil prices.

Like Noble, Transocean is an offshore contract driller, and it owns a fleet of rigs that it operates on a day-rate basis for third parties. The overall U.S. rig count is now down 50% over the last year and has fallen for 20 straight weeks. And as Economics 101 will tell us that as supply is pressured, prices go up (so long as there’s not a shift in demand.)

As an owner of Transocean call options, I’m putting my money where my mouth is when I call this one of the best stocks to buy in an environment of rising oil prices. Although RIG is cutting its $3/year dividend payout (the current yield is 15.9%) to 60 cents this year, that’s still a 3.2% yield at current levels.

Best Stocks to Buy for Soaring Oil Prices: National-Oilwell Varco (NOV)

Best Stocks to Buy for Soaring Oil Prices National-Oilwell Varco NOV stockYTD Return: -17%

At a market cap of $21 billion, National-Oilwell Varco, Inc. (NYSE:NOV) is the largest company on our list. Though not as sensitive to changes in oil prices as the previous two companies, you’ll still get some solid gains with NOV stock if the oil rally continues.

While its 3.4% dividend yield doesn’t quite compare to the hefty yields of the above two stocks, let’s not forget that 3.4% is pretty darn good in today’s low-rate environment. With both 10-year treasury yields and the dividend yield on the S&P 500 hovering around 2%, income investors should be eyeing the energy sector carefully.

NOV stock and its six-year record of not only paying but raising its dividend is also enviable and rather rare for its sector, and its 52% payout ratio also means its dividend is sustainable.

In his December article “The 5 Best Energy Stocks for the Next 5 Years,” InvestorPlace contributor Aaron Levitt mentions the compelling fact that NOV has “made at least one part of more than 90% of all the drilling rigs operating in the world,” as a reason investors should get excited over National-Oilwell Varco.

As of this writing John Divine was long Jan 2016 $28 RIG call options. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/3-best-stocks-to-buy-for-soaring-oil-prices-ne-rig-nov/.

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