The price of oil is giving everyone fits. Nobody knows what to do or how long the oil prices will remain at these levels.
The fact, however, is that energy is always going to be a good play. As you know from reading my column, I believe energy in all forms (especially oil and natural gas) will be with us for hundreds of years.
The question presented to investors is: which energy stocks to buy?
Now my normal course of action is to suggest the big producers/explorers, especially for long-term diversified portfolios. They haven’t been hit terribly hard and they will be the first to recover. So yes, buy at least one of the big names in energy stocks.
However, today I’m taking a different approach and looking for value in energy stocks. Normally, I would say that value stocks are great for conservative investors. But when it comes to energy stocks, value can get you in trouble.
That’s because, once you excise the no-brainer stocks in Big Energy, you have to start looking carefully at cash flow and debt. A lot of shale energy stocks, for example, are loaded with high-interest debt and are in serious trouble.
So where’s the value?
Value Plays in Energy Stocks
I’d start with Transocean Ltd (RIG). RIG was once one of the biggest plays in oil drilling. It is still in many ways, with its 71 mobile offshore drilling units, diversified across three different types.
While other companies are taking it on the chin, RIG stock has some pretty decent financials. Free cash flow is being devastated elsewhere, but RIG is hanging tough.
It’s got liquidity to the tune of $2.2 billion. RIG stock has $8.6 billion in debt at only about 5%, so it is manageable. It is losing money over the trailing 12-months, but saw $663 million in profit in the last two quarters. More importantly, it has $1.35 billion in free cash flow over the TTM. It trades at $13, off its 52-week high of $21.90.
Weatherford International (WFT) is another out-of-favor name selling at a good price. Weatherford is another brand of driller, but not out on the oceans.
WFT stock handles oil and natural gas well on land. It’s also in the midst of losing money, yet it is holding its own. This $9 stock has $520 million of cash on hand, but WFT’s $6 billion of debt does come with a high price tag at about 8%. However, it is generating just $11 million of free cash flow over the past 12 months.
My final play comes right from my own backyard. It carries risk, but at this point, the stock sells for under $3, so obviously there’s limited downside.
However, I think there could be strong upside if the company hangs on and if crude prices recover.
California Resources Corporation (CRC) produces oil, natural gas and natural gas liquids. CRC stock has interests in 2.4 million acres, but it is slightly diversified as well. It gathers, processes and markets oil and gas products, as well as produces and sells power.
CRC had a massive $3.5 billion write off in 2014, but absent that, its operations would have resulted in several hundred million dollars profit. It’s also free cash flow positive to the tune of $180 million in the third quarter.
As always, tread carefully. Oil can really slip you up.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
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