How to Trade Energy Stocks as Oil Whipsaws

The oil price crash has created a lot of problems for investors. For short-term traders, the challenge has been whether or not to short and when to cover.

oil-rigI shorted oil via the ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA:SCO)when the black fuel was at $60. Last week, something told me I should cover my position and I did, right before oil spiked the past few days.

That’s all well and good for me, but what about long-term investors? Energy stocks are critical and essential holding in diversified long-term portfolios. I call them “forever holds” because the world will always need oil and that’s not going to change soon.

But with oil crashing, then recovering, and who knows what next, how do you play oil and energy stocks now as a long-term investor?

Do you try and time the price of oil? Wait for a bottom? Is the bottom already in?

I think the play is to nibble around the edges right now and be patient. If you already own some energy stocks, hold them. Don’t sell in the panic — some big names aren’t even that badly beaten down. This gives you a chance to add modestly at good prices to your current holdings.

If you aren’t in energy stocks or are seeking to add, now is a good time to not only nibble, but to continue to add in small bits as the stock of your choice moves in either direction. That’s right, even if your stock pops from here by 10%, you can still add. Of course, as it drops, you want to be a bit more aggressive in adding in dollops.

Which energy stocks make the best choices?

I’d start first with a diversified basket, the Energy Select Sector SPDR ETF (NYSEARCA:XLE). This basket holds all the world-class names, and the top 10 holdings make up 62% of assets. This is the safest long-term choice because all of these holdings are going to be around in 50 years. I hold this ETF in my retirement portfolio.

If you are looking to add individual stocks, any of the famous names will do. They are all in fine shape. However, if I had to choose one, I’d go with Chevron Corporation (NYSE:CVX). It has a great balance sheet, with $14.5 billion in cash and $20 billion in very manageable debt. Although I’m not crazy about its lack of free cash flow recently, it has been investing in a lot of capital expenditures for long-term value. It’s also 30% off its highs, so you are getting a great value.

It is a close call with ExxonMobil Corporation (NYSE:XOM), which has a great balance sheet and tons of free cash flow, but less of a value as it is only off 15%.

I’d suggest one other thing: the Global X MLP (ETF) (NYSEARCA:MLPA) gives you exposure to a basket of pipeline MLPs for the long term. These infrastructure plays are critical to the energy sector and you want exposure to it.

The top 10 represents half of the assets. It pays a 4.4% yield and even during the oil crash, is only off 13%.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at As of this writing, he owned shares of XLE.

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