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3 Energy Stocks to Play a Breakout in Oil

oil stocks - 3 Energy Stocks to Play a Breakout in Oil

Source: Shutterstock

Back in 2014, WTI crude oil prices were north of $100/barrel. This was also a great time for oil stocks.

But oil stockpiles got too high at the same time that demand started to waver. The oil market was left with this massive oversupply glut, and that sent oil prices tumbling. By early 2016, WTI crude oil prices had fallen to below $30/barrel.

They rebounded off those lows, but oil prices have largely been stuck in the $40 to $50 range ever since May 2016.

Until recently.

Oil prices are now starting to break out to highs not seen since the big crash of oil in late 2014. The catalysts? Mostly steady production cuts from OPEC and others. But the rally has been given some extra fire-power recently thanks to global economic strength (which has firmed up demand) and rising geopolitical tensions (which has threatened global output).

All together, WTI crude oil prices are closing in on $70/barrel, and the rally looks like it will continue.

One way to play this rally is simply by jumping into oil futures. But another way to play the oil rally is through buying energy and oil stocks.

Here’s a list of my 3 favorite oil stocks to buy as oil prices keep rising.

Oil Stocks to Buy #1: Exxon Mobil Corporation (XOM)

Exxon Stock Is Too Cheap to Ignore

As a company that naturally benefits form higher prices at the pump, Exxon Mobil Corporation (NYSE:XOM) is a stock that is set to win as oil prices rise.

Historically speaking, XOM stock tends to track oil prices closely. As oil prices fall, so does XOM stock. As oil prices rise, so does XOM stock.

Importantly, though, XOM stock’s volatility in these moves is relatively muted compared to oil price volatility. This is because XOM is a giant business with tons of cash flows, big buyback power, a healthy dividend, and a long history of success. Those stable attributes help smooth out the volatility in oil prices.

From this perspective, XOM stock is a less volatile, less risky way to play a rise in oil prices.

XOM also has a big, stabilizing catalyst going forward in Guyana. Exxon Mobil hit a gold mine when they found oil in Guyana. For years, no one had been successful in this region. But in 2015, Exxon’s Liza-1 well discovered 90 meters of oil-bearing sandstone.

Over the next several months, Exxon found more and more oil. One of the finds was so promising (Turbot) that Exxon expects to drill another well there in 2018. Oil from these sites will begin flowing in 2020, so Guyana isn’t a near-term tailwind, but it could be a sizable long-term tailwind.

Meanwhile, the valuation on XOM stock is attractive. The company is cheap by historical standards, with its trailing cash flow multiple currently hovering around 17 versus a 5-year average of 20. The dividend yield is also higher than normal at 4.2% (the 5-year average dividend yield is 3.2%).

Overall, XOM stock isn’t really priced for a comeback in oil prices. Thus, the risk-reward asymmetry on the stock skews towards the upside in the event that oil prices keep rising.

Oil Stocks to Buy #2: General Electric Company (GE)

GE stock
Source: Shutterstock

Industrial conglomerate General Electric Company (NYSE:GE) has seen better days. Over the past several quarters, the company has become the poster child for how not to run a business. Revenues have dropped. Profits have dropped. And the stock has dropped.

But on its way to becoming one of Wall Street’s most hated stocks, GE plunged into deep value territory. The company, after all, is still behind some of the biggest and most recognizable businesses in the world.

One of those businesses is the company’s oil & gas business. That business has been one of GE’s biggest losers over the past several quarters. The company took a big bet on rising oil prices by merging with Baker Hughes A GE Co (NYSE:BHGE) in mid-2017. That didn’t pan out, and GE’s oil & gas business kept dropping.

But now oil prices are reversing course and heading higher. That means a turnaround in GE’s oil & gas business, which could be huge for the overall growth trajectory of this company.

Oil & gas comprised roughly 14% of GE’s total revenues last year. Therefore, a turnaround is meaningful to the company’s overall performance and could help get the business on the right track.

Such a turnaround doesn’t seem priced into GE stock at these levels. The stock trades at just 15-times this year’s hugely depressed earnings base. If oil prices bounce back, earnings won’t be depressed for long, and neither will this stock.

Oil Stocks to Buy #3: Anadarko Petroleum Corporation (APC)

anadarko petroleum corporation

Perhaps the purest (and riskiest) energy stock to play the oil rebound is Anadarko Petroleum Corporation (NYSE:APC).

As an oil and gas exploration and production company, APC’s business is heavily reliant on the price of oil. When oil prices are high and climbing, times are great and the stock does well. When oil prices are low and falling, times are awful and the stock does poorly.

That is why over the past 5 years, APC’s stock price has closely tracked the price of oil. There hasn’t been much variance. Big drops in oil prices are accompanied by equally big drops in APC stock price. Likewise, big rises in oil prices are accompanied by equally big rises in APC stock price.

Because of this, APC stock is a high-risk, high-reward play on rising oil prices. If oil prices keep climbing, APC stock will inevitably keep rising. But if oil prices tumble, so will APC stock.

There is also a strong argument that APC stock is undervalued here with oil prices being where they are. APC stock currently sits at $67 with WTI crude oil prices closing in on $70. The last time WTI crude oil prices were at this level, it was November 2014, and APC stock was trading in the $80 to $90 range.

Therefore, the argument for an $80 and up price tag on APC stock seems have some merit. If you are willing to take on the risk that is inherent to APC’s reliance on oil prices, then this stock could be the right pick for you.

As of this writing, Luke Lango was long GE. 

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