By Larry Gellar
Oil prices are hovering around $100 after sharp moves between $114 and $90 for a barrel of West Texas Intermediate. Brent crude prices have diverged in 2011, and nearly reached $130 amid the turmoil in Libya during the Arab Spring uprisings. Current Brent prices are around $114 per barrel.
Here are names we have investigated that do not yet reflect current oil prices:
Exxon Mobil (XOM): As one can imagine, Exxon Mobil runs numerous oil fields in the Gulf of Mexico. In turn, the price for oil from these fields is usually determined based on the going price for a barrel of West Texas Intermediate. Exxon Mobil stands to make a serious profit because the price for West Texas Intermediate has been going up. In fact, the price for West Texas Intermediate is expected to continue to increase as the economic recovery continues. As businesses in the U.S. expand, demand for oil will certainly go up. Although Exxon Mobil’s share price has increased in previous days, there is still room for further upside. Exxon Mobil is also well positioned to take advantage of the increasing price of Brent crude. More specifically, Exxon Mobil has a rather large holding in the Brent fields.
Chevron (CVX): Chevron gets the majority of its oil from outside of the U.S. As a result, the increasing price of Brent crude will benefit Chevron greatly as this is how the going price for many non-U.S. oils is determined. Like Exxon Mobil, Chevron’s shares have moved up as of late but there is still time to cash in. Share prices have not fully compensated for the change in oil price. Additionally, Chevron shares are still feeling the pain from the events in Libya. In other words, a good play could be to buy Chevron shares now and look for future increases as Chevron adjusts its business model. Overall, Chevron is the right stock to buy if you are a firm believer in the global economy. Otherwise, it may be better to look towards stocks like Exxon Mobil, that have more holdings in the U.S.
Conoco Phillips (COP): Many investors believe that Conoco Phillips will not grow much in the coming years, which may explain why it tends to trade at lower levels than some of its competitors. Regardless, there is still a return to be made by taking advantage of improving oil prices. It is specifically the increase in Brent crude prices that Conoco Phillips will benefit most from. In fact, Conoco Phillips often drills right on the North Sea, so it will be taking advantage of actual Brent crude and not oils that are merely priced based on Brent crude. The company’s U.S. oil production is limited, so it would be redundant to pair up a buy of this stock with a company like Chevron. A wiser diversification strategy would be to match it with a company like Exxon Mobil instead. On the other hand, oil industry experts estimate that a larger portion of Conoco Phillips’ oil comes from Texas than Chevron, so keep this in mind when deciding between the two. Conoco Phillips also has a sizable amount of natural gas coming from overseas, which should prove to be greatly beneficial.
BP PLC (BP): Since the Deepwater Horizon spill over a year ago, BP’s stock is behaving normally again. As a result, look for increases in the price of West Texas Intermediate to benefit BP similar to the way that it will benefit other companies with large U.S. oil operations. Once again, the best strategy is to buy now before BP’s price adjusts upward to account for improved revenue. BP has also had recent successes in its fight to minimize negative effects from the Deepwater Horizon spill, and it would not be surprising if the price has yet to account for this. At the very least, it is quite obvious that news articles regarding the Deepwater Horizon spill will no longer have the same negative impact that they did a year ago. Many hedge fund managers are seeing BP as undervalued. This is not hard to understand, as the company would certainly be trading higher if it were not for the 2010 oil spill. BP also has a sizable refinery in the North Sea, so it should also benefit from price increases for Brent crude.
Total S.A. (TOT): Possibly a less familiar name to some, Total is an oil producer based out of France. The key to understanding Total’s operations is that the price of Brent crude has a huge impact on the operation of European oil companies. Look for Total’s stock to benefit greatly from the increase in price of Brent crude. The stock price has already climbed due to the increase in oil price, but in most recent activity, the company's stock price actually declined. Watch for a secondary rebound in price in the coming days. The company’s diverse global operations make it a great complement to companies with more U.S. operations. There have also been rumors that Total is looking to buy out some smaller companies, which would also add value to the firm. Keep in mind that Total has a relatively small amount of U.S. operations when considering a purchase of this equity.
Statoil ASA (STO): Statoil’s situation is not much different from Total, being that it is a Norwegian oil company. The price of Brent crude impacts the stock greatly, and the price of Brent crude should continue to climb. This means Statoil’s stock will benefit, and the time to take advantage is now. One word of caution is that the nature of Statoil’s operations may give it more exposure to the debt problems of Greece. This increased risk is currently hurting the stock’s price, so a risk-neutral investor can take advantage and make a serious profit assuming the company’s operations aren’t affected. One huge advantage of investing in Statoil is that many of its operations use the Norwegian krone as currency, which should help to balance some of the other risks with Statoil’s operations. The best way to play Statoil would probably be a pairing with a stock like BP or Exxon Mobil. This will minimize risk while still taking advantage of increasing oil prices.
Two smaller oil plays also offer potential for significant price appreciation:
GMX Resources (GMXR): The idea behind investing in GMX is that this company is literally drilling in places that have never been drilled before. This is an exciting proposition in a sector that tends to go back to similar locations over and over again. Additionally, the timing of GMX’s new drilling locations could not be better. In consideration of the way that the global economy is recovering, oil prices will most likely be steadily increasing in coming months. This means that whatever oil GMX can get will be valuable. The actual properties of the oil that GMX retrieves will not be particularly important because oils of all types will be heavily sought after. GMX would be a great addition to purchasing one of the companies listed above. Aside from GMX’s new Bakken fields, the company also has holdings in less drilled places such as Wyoming.
ATP Oil and Gas (ATPG): The aftermath of the Deepwater Horizon oil spill hurt ATPG stock tremendously. Essentially, the company had numerous Gulf permits pending when the U.S. government imposed its moratorium on drilling. The company had its share of trouble prior to this as well, which at some point left it quite undervalued. The market has taken advantage, but the ride is not over yet. With rising oil prices to be taken advantage of, there is still a ways to go before the stock price returns to its fundamental value. ATP has found ways to improve its lot since the Deepwater Horizon spill, and the company is growing steadily now. Although the company is beginning operations in Israel, look for West Texas Intermediate to be an important factor in the future of this company. ATP’s operations in the North Sea are relatively small, so it is not expected that Brent crude will play as large a role in its future profitability.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.