It would seem that looking for opportunity in the energy patch is a fool’s errand. And to a certain extent it is.
Or maybe it’s a contrarian one.
The fact is, what’s happening now is a supply-side issue. A slow global economy isn’t consuming all the oil on the market.
Part of this was Saudi Arabia making a decision last year to keeps it hold on global market share. It saw the U.S. energy patch growing in influence and decided to take steps to slow down that ascendency.
It lowered the price of its oil and started producing a massive surplus of oil relative to demand. This sent prices through the floor and hurt U.S. producers because it is more expensive to produce oil in the U.S. (and Canada) than in the Middle East. Mideast oil producers can suffer longer than U.S. producers.
But some people are benefiting from cheap oil. And that means some companies are also benefiting. Here are six of the best.
A-Rated Energy Stocks: Tesoro (TSO)
Tesoro (TSO) is a refiner, so it’s more a demand-side player than a supply-side player. It matters little to TSO how much oil is, since its role is to turn the raw stuff into refined stuff and move it along.
It makes money on demand. As long as people are driving, freight is rolling in tractor trailers and trains are rolling, TSO is going to do all right.
Tesoro also runs retail gas stations in 16 states under numerous global brand names as well as its own, and it does a decent amount of natural gas and natural gas liquids business as well.
So here is the other benefit to running a demand-side operation: growing margins. There’s a fixed cost for refining oil and natural gas. If its input prices drop by more than its output prices do, then it’s making more money. Also, increasing demand, even at lower prices means more money for TSO.
A-Rated Energy Stocks: Valero (VLO)
Valero (VLO) is one of the largest U.S. refiners.
And its story is the same as all the midstream players. It’s not really worried about what’s happening upstream — what the industry calls the exploration and production (E&P). It’s really focused on the demand side more than the supply side, which is a very good thing in this market.
The other midstream players — the companies between the oil fields and the end users — are the pipeline firms. And they are having a tough go of it because U.S. field are shutting down production, which means that they have less product moving through their pipes.
VLO is more demand-side focused, so as long as demand is reasonably strong, it’s doing well. And the one thing about cheap oil and gas is that it gets consumed in larger quantities. When travel is cheaper, more people take advantage — whether it’s by car, plane or cruise ship.
VLO is up almost 50% this year but still only sports a P/E ratio of less than 8.
A-Rated Energy Stocks: Par Pacific (PARR)
Par Pacific (PARR) has been on a tear, lately — up more than 35% in the past three months. It’s up 49% year-to-date, so all but 14% of that move happened in the latest quarter.
PARR is primarily a refiner with a unique niche. Most of its operations serve Hawaii. That’s certainly a great market with significant barriers to entry, but it doesn’t lend itself to a lot of growth.
In October, PARR changed its name from Par Petroleum to Par Pacific to reflect its core business. But the name change signifies another change: At this point, it’s all about growth.
PARR sees a midstream — and upstream — sector with plenty of bargains. And it’s ready to buy.
TSO has about a $14 billion market cap. VLO’s is about $35 billion. PARR’s is just under $1 billion. While the big boys work their downstream operations for all their worth, PARR is looking to grow on the mainland and expand its footprint.
If you’re looking for solid company that is using the current weakness in the energy patch as a chance to get big at good prices, PARR is worth serious consideration.
A-Rated Energy Stocks: Nordic American Tanker (NAT)
One of my newest Emerging Growth Portfolio members is Nordic American Tanker (NAT).
The company acquires and charters double-hull tankers, and currently, it has a fleet of 26 Suezmax crude oil tankers.
And this is actually a great time for tanker companies because cheap oil prices mean countries and large companies see this as the ideal time to stock up on fuel.
For example, if you’re a major airline, while many times you aren’t likely to take delivery on the futures contracts you trade at higher prices. Now, it makes sense to buy and store oil a current prices, either to trade later or use for your fleet.
As all this activity grows, NAT is in perfect position to capitalize.
In Q3, NAT posted a 7.4% earnings surprise and a slight sales surprise. And looking forward to Q4, analysts are forecasting 4,600% earnings growth year-over-year and 102% sales growth.
Needless to say, NAT’s 10% dividend looks pretty solid.
A-Rated Energy Stocks: Euronav (EURN)
Euronav (EURN) is a Belgium-based vertically integrated shipping company that’s relatively new to the U.S. market.
It listed last year on the OTC and has since relisted on the NYSE, where it has seen its volume grow exponentially.
It was very good timing, as the oil markets turned on their heads last year. And while Q3 is traditionally a weak quarter for tanker firms, this year has seen a banner Q3.
Revenue in the first 9 months of the year has almost doubled from last year. That will tell you all you need to know about the current demand for oil tankers at this point.
EURN leases ships long-term and on the spot market. But it also will work storage, personnel, logistics … almost anything else you need for getting oil from point A to point B, anywhere on the globe.
And something to note: While its initial dividend payments have been ho-hum, if the year finishes as expected, you can look forward to a payout in the neighborhood of 10%. That’s a pretty nice neighborhood.
A-Rated Financial Stocks: DHT Holdings (DHT)
DHT Holdings (DHT) is a Bermuda-based tanker firm that is having a banner year. Almost every quarter tripled last year’s revenue and income.
While the stock has been treading water over the year, it kicks off a 9.9% dividend, which will certainly help offset its lack of growth.
The Great Recession devastated tanker companies. When economies aren’t consuming or producing, there’s no real demand for oil.
But now, prices are so low that many countries and companies with means are building reserves. And energy-intensive industries like shipping and airlines are stockpiling reserves to help keep their margins growing as new competition emerges in many sectors of those markets.
DHT is one of a group of small tanker companies that have emerged after the last washout in the sector. These are traditionally great dividend payers, although the summer months are usually the worst months for the firms since there’s usually a lull in the energy markets before the big winter prep season starts.
This year has been unusual on that point, but it’s likely that as the global economy improves many of these smaller players will begin to grow by consolidation, which means buyouts at premiums.
Whether DHT becomes a target or a buyer, it’s worth the ride.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.