Opportunities in the Oil Sector

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Includes: BP, CVX, DO, ESV, NOV, RDS.A, RIG, SLB, TOT, XLE, XOM
by: Davy Bui

Kathy asks:

I just read your recent post on Seeking Alpha discussing opportunities in the energy sector. If you had 10K would you put it in COP or one of the major integrateds now? Or where? RIG or SLB?

Thanks for writing, Kathy. I won’t be making any specific recommendations but I’ve put together a little spreadsheet on some of the major oil companies with some interesting statistics I pulled from a recent issue of S&P’s Creditweek: Major integrated oil company comparison spreadsheet.

These tables contain some clues as to which of the big oil companies are most efficient. I’ve provided some additional financial metrics which may provide some help if you wanted to determine which company’s stock is relatively cheaper. Here is a link to a Google Finance chart showing the performance of these stocks in the last year in case relative performance is important to your portfolio. No surprise that ExxonMobil (NYSE:XOM) performed best among these stocks but that also means a premium is built into that stock.

Generally, while the financial heft and high dividend yields of the big oil companies are attractive, the more enterprising investor may want to look at some of the major independents for better future returns. While I do own one oil-service company, Ensco International (NYSE:ESV), my personal preference is to avoid that sector as free cash flow and dividend yields are rather paltry. But some of those stocks are very popular in the investment community and could enjoy great returns despite my reservations.

You mentioned two of the most well-known names, Schlumberger (NYSE:SLB) and Transocean (NYSE:RIG). Two other names I’ll throw out there are National Oilwell Varco (NYSE:NOV) and Diamond Offshore (NYSE:DO). NOV was a popular hedge fund holding last year that got tossed out along with everything else but it generated lots of free cash flow and is situated in a more resistant part of the industry. DO is part of the Tisch Loews (LTR) empire and has paid out “special” dividends in the last few years. They do have an older fleet though so take that into consideration as well.

Finally, passive investors may want to consider an ETF and avoid stock-picking altogether. The Energy Select Sector SPDR Fund (NYSEARCA:XLE) is among the largest of these, yields 2.5% and holds a variety of companies across the industry spectrum.

Any stocks mentioned here are for informational purposes only and are not recommendations. Please check my portfolio spreadsheet for disclosures. Also note that even if I own one of these stocks, that does not necessarily mean I would recommend buying it today.

I have to reiterate that nothing posted on my blog should be construed as personalized financial advice. Readers are advised to consult a qualified financial advisor for help with their investments. I am pretty much required by law to say this — it is up to you to determine whether that course of action is best for you. Bottom line is that you, and only you, are responsible for your investment decisions.

Disclosure: Author holds long positions in BP and ESV