The pain in the oil markets has scared away a number of investors, and for good reason.
The price of West Texas Intermediate crude oil is still down close to 60% over the last 18 months. This violent move has pushed the stock prices of major oil producers to multi-year lows.
However, oil investors have caught a break of late as the price of oil has rallied. We’ve now seen close to six straight weeks of consecutive increases in the WTI crude oil price. Crude traded below $30 a barrel earlier this year and is now hovering at the $40 level.
But this type of movement in oil prices might be justified, as we may have just seen the bottom. A lot of supply has been taken out of the market as oil producers shut down production to save cash flows, as well as to avoid selling their commodity at rock-bottom prices.
Specifically, the number of oil drilling rigs in the U.S. that are operational has fallen by 70% from the highs of just a couple years ago. The rig count is now back to 2009 lows, when oil was trading at similar prices as today.
Other things helping support an oil price bottom are the fact that the expected influx of Iranian oil to the market (following sanctions being lifted) hasn’t happened, and we have the potential for production cuts and freezes in the OPEC countries.
Thus, it could be time to load up on the beaten-down oil stocks. Here are three stocks to put on your watch list:
No. 1 Oil Bottom Stock: ConocoPhillips (NYSE: COP)
ConocoPhillips offers a 2.5% dividend yield after a recent dividend cut. It’s not great news when you see a company cut its dividend, but it was the prudent move here. The dividend cut also helped bolster ConocoPhillips’ balance sheet.
Still, shares of ConocoPhillips have lost half their value over the last 18 months. Meanwhile, Exxon Mobil (NYSE: XOM) shares are flat over the same period.
ConocoPhillips has a global resource base that it can tap, but it’s also more of a pure-play on U.S. shale than the likes of Exxon Mobil and Chevron (NYSE: CVX). Thus, if oil prices do move higher, ConocoPhillips should be an even bigger benefactor. ConocoPhillips also has access to oil sands and liquefied natural gas, which provide it with a stable production base.
No. 2 Oil Bottom Stock: Phillips 66 (NYSE: PSX)
Phillips 66 is the best refiner around, as well as one of the largest. This is the same oil stock that Warren Buffett has been betting big on. Granted, this isn’t a high-growth business, but it’s a steady one, and the company offers a 3.5% dividend yield.
Phillips 66 was spun off from ConocoPhillips in 2012 and is up 140% since then. However, there’s still plenty of upside remaining. It has a strong balance sheet and has managed to expand its portfolio from just refining to natural gas pipelines and petrochemicals.
As well, Phillips 66 will see the benefit of higher revenues if oil and gas prices further rebound, but it will also benefit from the world’s growing population and increased demand for things like plastics, car tires and fertilizer.
No. 3 Oil Bottom Stock: Helmerich & Payne (NYSE: HP)
Now, the two names above are ones you’ve likely heard of before, but this land driller might be new to you. Helmerich & Payne has navigated the rough oil price environment fairly well, despite the fact that its stock is down 40% in the last 18 months.
Nonetheless, it’s set itself up to keep generating plenty of cash even if oil prices remain low, as it still has one of the best oil drilling rig fleets in the industry – including rigs that can handle the complexities of hydraulic fracturing.
The company also offers a 4.7% dividend yield, has minimum debt and has upped its dividend for 43 straight years. It has more cash than debt on its balance sheet too, as it’s managed to recognize the volatility of the industry and has kept spending in check.
No one knows for sure whether the oil market has bottomed. However, investors with a long-term horizon can get certain oil stocks at multi-year lows. And one thing that can help ease the volatility of oil is dividends – but just make sure your stock’s dividend is relatively safe. The three stocks above are great places to start.
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