It has been a tumultuous 12 months for oil prices, which began their precipitous slump about a year ago. However, it looks like a recovery is underway, and it’s time to scour the sector for the best stocks to buy for rising oil prices.
Since hitting its lows on Mar. 17, oil prices are up 25%, and the price of WTI crude oil now trades around $60 per barrel. Brent’s also well off its lows, and trades near $65 per barrel today.
All sorts of things contribute to the going rate of black gold, but in all reality there are only a few drivers behind the recent oil rally: a falling U.S. dollar and a sense that the Organization of the Petroleum Exporting Countries, or OPEC, won’t increase production and boost supply.
With the global demand for oil also expected in the second half of 2015, the time to aggressively play the rebound in energy prices is now. But how, exactly? Look no further. Here are the three best stocks to buy for rising oil prices.
Stocks to Buy for Rising Oil Prices: Transocean (RIG)
Return Since Oil Price Bottom (3/17/15): +40%
Transocean (RIG) operates a fleet of oil rigs, offering its offshore drilling services to some of the largest energy companies in the world, including Chevron (CVX), BP (BP) and Royal Dutch Shell (RDS.A, RDS.B).
It’s important to note that RIG stock, like the other two stocks on today’s list, is quite an aggressive way to play the rebound in oil prices. The RIG stock price typically has an exaggerated, instantaneous reaction to energy price fluctuations; it becomes far less economical to drill for oil when oil is cheap than when it’s expensive.
Thus, when oil prices are in the dregs, the big boys like Chevron and BP will either choose to cut back on production or simply pay Transocean far lower rates for its services.
But when oil is on the up-and-up — as it is now, RIG is definitely one of the best stocks to buy, as seen withs its 40% return since oil’s 52-week bottom in March.
Stocks to Buy for Rising Oil Prices: Seadrill (SDRL)
Return Since Oil Price Bottom (3/17/15): +35%
Seadrill (SDRL) is actually a direct competitor to Transocean, also operating as an offshore drilling contractor. Its economics are pretty similar, offering aggressive investors leverage that’s comparable to RIG stock.
However, unlike Transocean, Seadrill is actually profitable — and trading at bargain-bin multiples. SDRL stock changes hands at a forward P/E of just 6 and a price-to-book of 0.6.
One reason investors are hesitant to get too confident with SDRL is its dividend — or lack thereof. After going six years without freezing or cutting its dividend, Seadrill was forced to suspend its dividend in November in order to become leaner and plow more money back into operations.
There’s no telling exactly when that dividend will be reinstated, but the company’s doing its best to save cash. Wells Fargo analyst Judson Bailey believes the company will delay the delivery of $4 billion in rigs through 2017, and also expects the company to save an additional $300 million annually by reducing maintenance costs and wages.
In any case, these cost-cutting techniques, combined with an oil rally, could spell the reinstatement of the dividend sooner rather than later. And the prospects of an oil rally are improving.
Saudi oil minister Ali al-Naimi helped reassure markets about the balancing supply/demand dynamics, saying on Monday:
“Demand is picking up. Good! Supply is slowing, right? That is a fact. You can see that I’m not stressed, I’m happy.”
Partly due to al-Naimi’s commentary, the consensus expectation is that OPEC will announce an unmoved production goal of 30 million barrels per day when it meets on Friday in Vienna. If supply can stay in check, and especially if the U.S. dollar can continue its pullback, there’s little doubt SDRL will remain one of the best stocks to buy.
Stocks to Buy for Rising Oil Prices: Cameron International (CAM)
Return Since Oil Price Bottom (3/17/15): +21%
The last way to aggressively play a rebound in energy prices is Cameron International Corporation (CAM), which produces much of the equipment that’s vital to the drilling process. Whereas companies like BP and Chevron are customers of Transocean and Seadrill, Transocean and Seadrill are customers of Cameron International.
The company sells just about everything leaders in the oil and gas industry might need: total rig package solutions, wellhead systems, subsea technologies, machines used to treat and refine oil, and much, much more.
At a price-to-earnings ratio of just 14, CAM stock is both affordable and a great play in times of rising oil prices, when its customers are more willing to invest in capital expenditures if they can see an imminent payoff.
Another positive: Because CAM also sells equipment to refiners, the stock is modestly insulated from low oil prices, which tend to boost refiners’ margins, giving them more money to invest in equipment.
But that’s not all that makes CAM one of the top stocks to buy. This company isn’t afraid to partner with other leaders in its industry: OneSea, a jointly owned endeavor by Cameron and Schlumberger (SLB), just received a $330 million contract to install subsea production systems off the coast of North Africa.
As of this writing John Divine was long Jan 2016 RIG $28 calls. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
