Three Oil Stocks to Weather Any Storm

Goldman Sachs analyst Argun Murti warned that oil could hit $200 a barrel last May as crude prices hit the $123 mark for the first time. Now, University of Calgary professor Philip Verleger is predicting $20 per barrel oil as the global slowdown eats into demand while destroying anticipated supply. The lesson here is that nobody really knows where oil prices are headed, but that doesn’t mean investors should avoid the oil sector. Rather, investors should build a well balanced portfolio to weather any storm.

The first thing taught in university investment courses is the concept of diversification. The best way to reduce risk is to diversify holdings across many different sectors. Similarly, the best way to diversify risk within one sector is to choose different types of businesses within the sector. This ensures that even if one sector falls, the others will rise to make up for it. The result is smoothed portfolio performance during even the roughest of economic times.

The oil sector has several different players:

• Drillers – These are the companies that take the oil out of the ground, either on land or under the sea. One of the best oil driller plays is Petroleo Brasileiro (PBR), also known as Petrobras, which discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro.
• Shippers – These are the companies that take the oil from Point A to Point B by shipping it across the ocean. One of the best oil shipping stocks is Frontline (FRO), which is trading at a very low earnings multiple with a high dividend yield.
• Refiners – These are the companies that take crude oil and refine it into gasoline and other usable substances for consumers. One of the best refiners in the business is Marathon Oil (MRO), which has combined exploration with refining to create a strong business.

Owning these three stocks can help investors gain prudent exposure to the oil industry. Higher oil prices can boost prices for drillers, but could put pressure on refining margins and vice versa. Meanwhile, shipping companies rely more on demand than just pricing. Remember, increased supply with consistent demand could lower prices without lessening demand. All in all, diversification, even within a sector, can help reduce risk.

Comments

[NOWHEREMAN:]

PBR is not a driller ala SLB, HAL, RIG. It is an E&P company which has a large number of deep Sea Rigs under contract, it has asked for funding from the Brazilian Gov. Its future was/may still be on the drawing board. China just pumped in $10 Billion, terms undisclosed. The discoveries require $70+ oil to be feasible. Good luck on any foreseeable timeframe for production.

MRO has a major new addition to their refining capacity due to come online in 2010. Hopefully, oil will be high enough for them to take advantage of it. Very good choice. Maybe Obama will not Tax them too much.

FRO, has new build problems. What sort of sticker shock will it suffer if it eliminates its dividend entirely and/or has to increase the number of shares Outstanding?

There are many great, now cheap, E&P companies with cash in hand, Ditto oil tankers stocks. Since I stick to those with little or no debt, FRO is not on my list nor are Most E&Ps because of the lack of dividends.

In the Tanker sector, TNK and NAT, TNK because I own shares and they are structured to payout vitually all of the income earned, NAT because a credit squeeze will not affect their earnings having cash and no large debt to service.

IMHO

2008 Dec 11 08:44 AM

[Boubou:]

FRO no longer has a high dividend yield. Fro prospects depend on oil consumption, not high oil prices. FRO runs on high debt. Frederiksen is eliminating dividends on most of his shipping companies at the moment.

2008 Dec 11 09:39 AM

[NOWHEREMAN:]

Thanks, I won't spend anymore time looking through their last 10k.

2008 Dec 11 10:23 AM

[Jake Taylor:]

Petrobras does contract its rigs to drill, but it is still a driller in the sense that it is taking oil out of the ground. Isn't a widget manufacturer that outsources its operations in China still a widget manufacturer? The SEC filings that I read also point to $40 oil as a pricing point and since Saudi Arabia uses these same estimates for its public infrastructure programs, I think it's a reasonable price for oil long-term, making its projects feasible. Finally, the discovery off the coast of Rio de Janeiro is already producing and since it is a quasi-governmental company, it has pretty much secured the rights to these areas (unless the government sets up another company at the risk of angering the investment community).

TNK and NAT are both very good companies and I'd also be a buyer of either of those as a substitute for FRO. You're right that it is having problems with the builds right now, but they have laid out a realistic plan to solve it. However, NAT has a great balance sheet and TNK is actually a stock that I own (and therefore was hesitant to write about).

2008 Dec 11 10:26 AM

[oilsands:]

Boubou,
What other shipping companies does Frederickesen own?
Jake,
don't hesitate to write because you own a stock; just state that ownership plainly.
I really like the oil services companies, although I still have some Canadian and US oil royalties. Harvest has both producers and a refinery.

2008 Dec 11 12:02 PM

[boxcar:]

Frederickeson has about 35% interest in SFL, GLNG, GO and Seadrill (SDRL) as well as a fish farm. I always said if he ever runs short of money, the will offer fish as dividends.

2008 Dec 11 02:29 PM

[NOWHEREMAN:]

Every E&P company drills for oil, They are not drillers and will never be such. Unless they own their own rigs and start leasing them to others.

Does PBR own its own Deep Sea Rigs?

2008 Dec 12 08:58 AM

[Alan von Al...:]

Jake, in a sense you're right, Petrobras certainly owns and operates a lot of the Campos Basin rigs that account for 80% of their production. PBR is also conducting an aggressive presalt exploration program. Altvaras is also correct, that PBR has contracted semisubmersibles and FPSOs from "pure drillers" who provide upfront FEED, hulls, topsides, subsea engineering and crews to conduct drilling operations on behalf of Petrobras.

Unfortunately, the dayrate drillers are going to get screwed bigtime when it becomes obvious to all concerned that there isn't any recoverable oil in Tupi and Carioca presalt, and PBR defaults on their contracts.

www.bloomberg.com/apps...

Jan 09 02:37 AM