So unless you’ve been living under some shale, you know that oil prices have crashed over the past few weeks, from more than $100 to about $66.
Many of you know that I consider energy to be a core holding of any long-term diversified portfolio, and some stocks are even “forever holds.” These are stocks that are so wrapped into our DNA as human beings, and so intrinsic to the daily lives of every human being around the globe, that their constant usage virtually guarantees long-term investment returns.
With oil on sale, a lot of energy stocks are getting clobbered. This is a great chance to pick up some forever holds and other energy names, and a time to avoid others.
I feel that any of the big name, legendary oil explorer-producers make a good addition to your portfolio. There is really no bad choice here. In these situations, I would go for the stock that has been hardest hit. The theory is that, as a global brand name, it is going to come back at some point. To that end, you want the energy stocks that have the furthest to go to climb back.
Right now, that’s ConocoPhillips (COP). The stock is down to $69 from its recent high of $86, or about 30%. COP stock has $5.8 billion in cash, $25.8 billion in long term investments, and $19.5 billion in debt. It isn’t generating the kind of cash flow I’d like, but it isn’t going bankrupt, either. I think you have strong upside here, along with a 4.4% dividend.
The oil service sector is going to get hurt in the medium term by lower oil prices. I would sell anything you have there. You may even want to consider going short on energy stocks, which you can do by shorting SPDR S&P Oil & Gas Equipment & Services ETF (XES). This is a good candidate for sector shorting because the top 10 holdings make up 26% of the asset base.
Look also to short smaller firms involved in shale exploration. These companies are still trying to generate free cash flow, are highly levered, may have trouble refinancing debt, and have a lot of junk bonds issued that they may struggle to pay on.
The smaller oil service companies in the iShares Dow Jones U.S. Oil Equipment & Services Index Fund (IEZ) are going to struggle amidst lower oil prices, and it makes for a fine short candidate.
Then there’s oil itself. Whereas oil service and producer stocks are going to feel the effect of lower oil prices over a period of time, the price of oil itself can fluctuate madly day-to-day. I think the easy shorting money has already been made. The question for investors is when is the right time to go long oil again?
I think you want to start buying around $55-60 and average down. There are several ETFs you can choose from. The United States Oil Fund LP (USO) is one way to go. If crude falls all the way to $40, I might even consider an aggressive leveraged play like VelocityShares 3x Long Crude EN (UWTI).
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
