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At times, companies or sectors that are in the most troubled areas provide the best buying opportunities. At other times, companies or sectors in seemingly unrelated areas can provide the best opportunities to profit from troubles.
Currently, the energy sector is out of favor. Stock prices here are under pressure from concerns of weak oil demand and a stronger dollar. The BP (NYSE:BP) oil spill and the moratorium on U. S. deepwater drilling have added to the sector’s woes. The Energy Select Sector SPDR ETF (NYSEARCA:XLE) is down 6.0% this year trailing the S&P 500 by more than 500 basis points.
Valuation metrics in the energy sector appear attractive. ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) shares yield 3.0% and 4.0%, respectively. Share of Noble Energy (NYSE:NE) and Transocean (NYSE:RIG) trade at forward P/E multiples of 6.8 and 6.0, respectively.
Are energy stocks a worthwhile contrarian play or are there other ways to make money from the oil spill as well?
Selected Energy Plays are Appealing
There are too many negatives to render energy stocks attractive across the board. The moratorium on offshore drilling is an obvious negative for offshore drillers as well as oil & gas companies scouting offshore for petroleum. Rising insurance costs, tightening regulations, and slower pace of permitting are likely to raise operating costs for integrated oil companies.
Natural gas can however be a potential beneficiary of the oil spill as emphasis on safer ways of producing energy gain in importance. Regulatory changes requiring robust casing architectures and frequent testing can provide more business opportunities for oilfield services companies.
Shares of Forest Oil (NYSE:FST), iPath DJ-UBS Natural Gas ETN (NYSEARCA:GAZ), First Trust ISE-Revere Natural Gas (NYSEARCA:FCG), and Fidelity Select Natural Gas (FSNGX) offer ways to play natural gas. In the oilfield services space, Schlumberger's (NYSE:SLB) ability to provide a diverse range of services makes its position appealing. Among integrated oil companies, ExxonMobil has upped the ante on natural gas with its purchase of XTO Energy and is well-positioned to benefit from an upswing in this commodity's price.
Opportunities outside the Oil Patch
The negatives impacting many groups within the energy sector strengthens the case for underweighting energy stocks.
Another way to profit from the oil spill lies in the insurance group. Insurers and re-insurers stand to benefit from both higher demand and higher rates as oil & gas producers lose the appetite to self-insure in light of massive damages and costs incurred to clean up the oil spill.
The fundamentals for the insurance industry too are on the mend. The rally in equity and credit markets has improved the financial position of many insurers. Book values are increasing and unrealized losses are declining.
To profit from the improving prospects of the insurance industry, investors can look to SPDR KBW Insurance ETF (NYSEARCA:KIE), iShares DJ US Insurance ETF (NYSEARCA:IAK), PowerShares Dynamic Insurance ETF (NYSEARCA:PIC) and Fidelity Select Insurance (FSPCX).

I have long positions in XLE, CVX, GAZ, and FSNGX. I do not have long or short positions in any of the other securities discussed.



Disclosure: I have long positions in XLE, CVX, GAZ, and FSNGX. I do not have long or short positions in any of the other securities discussed.

Source: Overt and Covert Ways to Profit From the BP Oil Spill