One of the biggest questions asked by investors today is, “What’s going to happen to the price of oil?” We have heard dire predictions of $20 per barrel as the pumps all over the world keep pumping in an international game of fiscal chicken.
But not everyone is so pessimistic. T. Boone Pickens thinks we will see oil prices rebound almost entirely over the next 12 months.
The head of energy investing for private equity firm Warburg Pincus said this week that he thinks that oil may stay down here for a while before eventually reaching an equilibrium price of $70 to $85 per barrel. He thinks that time, not price, is the biggest risk in oil prices right now.
Prices should eventually recover, but no one knows how long that might take.
As investors, we need to view oil stocks through the lense of “safety first.” I think that the long-term recovery potential of oil stocks is enormous, but we have to focus on companies that are strong enough to survive until they can thrive again when prices do finally recover. One way to accomplish this is to focus on oil stocks that have strong balance sheets with minimal financial risk.
We can use the Altman Z-score to help us accomplish this task. The measure of financial strength was develop by Professor Edward Altman of the NYU Stern business school and has been used since it was first developed back in 1968. Since we do not have any idea how long it may take for an oil recovery, I also prefer dividend-paying companies so I get paid to wait for conditions to improve.
Chevron Corporation (NYSE:CVX)
Among the largest oil companies Chevron Corporation (NYSE:CVX) remains one of my favorite blue-chip stocks for bet on an oil recovery. While the company has halted buybacks and reduced its capital expenditure budget as a result of oil prices, I do no think that the dividend is in jeopardy at this time. At this price the stock yields 3.94%.
Chevron has a z-score of 3.3, so it is above the 2.99 level that indicates a financially strong company with little chance of financial stress for the next few years. At 10 times earnings and 1.4 times book value, the stock is reasonably priced when compared to other dividend-paying, blue-chip stocks. Patient investors should be well rewarded for long-term ownership of the company at current price levels.
Occidental Petroleum Corporation (NYSE:OXY)
Occidental Petroleum Corporation (NYSE:OXY) actually entered 2015 in solid financial shape. The company has been disposing of risker assets and non-core operations and has built up a substantial cash hoard of $8.7 billion. As a result, the company has a z-score of 3.2 indicating solid financial health.
OXY could pay off all of its long-term debt right now and still have about $2 billion left, so it’s in a great position to survive until it can thrive. At the current price, the stock is yielding 3.6% so you are getting well paid to wait for higher oil prices. The stock is nicely valued at this level, trading at 1.4 times book value and just 11 times earnings.
CARBO Ceramics Inc. (NYSE:CRR)
CARBO Ceramics Inc. (NYSE:CRR) is one of the more interesting energy stocks right now. The company makes and sells ceramic proppant used in the fracking process and provides software and engineering consulting services for the shale oil and gas industry. As oil prices have fallen, rig counts in shale fields have dropped and customers have switched to cheaper proppants such as sand.
While near-term results will probably remain weak, the company is in good shape with a z-score of 6.20, so CRR should be able to outlast lower oil prices. CRR stock is yielding 3.57% and Carbo recently announced a share buyback for almost 10% of the company, so management is trying to reward patient shareholders. It may be a very bumpy ride but this stock has the potential for substantial rewards when oil prices recover.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.
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