With oil prices stabilizing and OPEC apparently agreeing to production cuts (for now), it suggests that some of the beaten-down energy stocks on the market may be stocks to buy at this point in time.
Readers of my column know that I consider some form of fossil fuel energy holding to be vital for any long-term diversified portfolio. One of my central investing tenets is that if a product is wrapped around the human experience in a manner that is effectively permanent, it makes for a great investment.
There’s nothing wrong with going with any of the big energy stocks — the explorer-producers, or exchange-traded funds that have a diversified basket of stocks. However, for those of you who are more interested in value plays that may offer outsized returns, you may want to consider these beaten-down names.
These energy stocks have taken greater hits than most of the big names for various reasons, but I also think they have further ground to gain going forward.
Energy Stocks to Buy: Transocean (RIG)
Transocean Ltd (NYSE:RIG) is an offshore drilling provider, able to pull out oil and gas from 61 mobile deepwater rigs. It’s very cool stuff, and you should check out Peter Berg’s film Deepwater Horizon to see some of the technology involved.
At the peak of the oil speculation blowoff in 2007, RIG stock hit $170 per share. Today it’s at $15, thanks to that blowoff collapsing, followed by the oil price crash of 2014-2015.
That’s actually up from $10 a share just a few weeks ago.
RIG has managed to do very well for itself, as far as energy stocks go, despite oil price shocks. The past three years it had gross profits, and still had net income of $791 million in fiscal year 2015. It has over $1.1 billion in net income over the trailing 12 months.
That’s because its $7.2 billion in debt only costs about 1.5%, allowing it also to generate free cash flow even during the downturn.
Energy Stocks to Buy: National Oilwell Varco (NOV)
National-Oilwell Varco, Inc. (NYSE:NOV) is exactly the kind of diversified oil services company that I love when it comes to energy stocks to buy, because it deals in all kinds of elements related to the industry. It provides actual land drilling rigs, but also offers high-margin spare parts and repair services. Additionally, it provides what I refer to as “equipment infrastructure,” which is all the stuff that actually makes the rigs operate — power generation, fluids, waste management, pipes, instruments, drill bits and so on.
Its one other segment is even more detailed, but handles “completion and productions solutions,” like pumps, blenders, sanders, flowlines and everything else needed for that portion of any drilling operation.
NOV has a solid balance sheet with plenty of cash, has plenty of free cash flow and trades at about $40 — nearly 50% off its all-time high. I think there’s more room to run here with limited downside.
Energy Stocks to Buy: Anadarko (APC)
Anadarko Petroleum Corporation (NYSE:APC) trades at $70, compared to its all-time high of $112. So as energy stocks go, it is off some 38%.
APC stock operates in three areas across the sector. It is an explorer and producer of both oil and natural gas. Anadarko operates in the “midstream” segment as well, in which it gathers, processes, treats and transports oil and gas. Finally, it has a marketing segment.
Its asset portfolio is spread all over the world, from the Rockies to Appalachia, from Alaska to the Gulf of Mexico, and in Algeria, Ghana, Colombia, New Zealand and Kenya.
While revenue was hit badly in FY 2015, it has stabilized in FY 2016. Still, APC is back on the cusp of profitability this year. It is weaker as far as the free cash flow situation goes, compared to the other choices, but it also has $4 billion of cash on its balance sheet.
This play is a bit riskier, but its diversification helps.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he is short WRLD and holds puts. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.