The One Sector You Must Own for the Next 10 Years

by: Joseph L. Shaefer

As markets correct, every sector will be affected. But some have shown their ability to bounce back and grow ever stronger. Higher lows and higher highs characterize their relation to the markets. No sector has been more successful in tracing this sort of history than the energy sector.

What to buy? In the oil business, in particular, it might be easier to answer the question, "What not to buy?" A better answer may be that there will always be some lucky wildcatter who succeeds by a superior gut feel for a property or a source of capital, but in fact the easy finds are gone. For that reason, over the years I have switched my emphasis, at least among the E&P crowd (the explorers and producers) to the biggest and best-capitalized of the multinationals. It takes billions of dollars today to stay in this business. A company needs deep pockets to withstand the occasional run of exploratory bad luck in order to reap the rewards of successful discovery down the road.

Of course, big doesn’t mean expensive. You can still buy some of the best names for single-digit PEs – rarer and rarer – or for low-teen PEs. Most pay dividends that are way better than CDs or money market funds and raise those dividends regularly. In addition to the E&P firms, there are scores of quality drillers, rig-builders, and other servicing firms, a like number of pipeline outfits, ever more natural gas firms, and some superb coal companies. There are only a handful of uranium firms of any size but lots of “penny dreadfuls” for your consideration, and there are the alternative energy providers, be they biomass, solar, wind, geothermal or pie-in-the-sky.

I am a big fan of the oil service firms and rig-builders because they can do well whether it's the majors or the minors who find success in the oil patch -- and, indeed, whether or not any of them find success! If I'm an oil drilling rig provider, you pay me up front whether or not you ever find a drop of oil. And if you go bankrupt because you never find a thing? Too bad, so sad, someone else rents my rigs.

I’ll talk about the coal, gas, refiners and uranium firms in a follow-on article, but for now let’s dive right into Big Oils and those who provide them what they need to find the oil and gas:

The Bigger the Better

EXXON MOBIL (NYSE:XOM) is certainly the class act of American-based oil companies. If you had bought XOM 20 years ago this month, you'd have paid (split-adjusted) between $12 and $13 a share. It closed a little above $85 on Friday. Back then, you’d have received 68 cents a share every year in dividends. Purchasers today would receive $1.76 a year. Those who bought it 20 years ago have received more in dividends – by far – than they paid for their shares. It’s nice to play with the house’s money! The best-run companies find a way to keep making money no matter the external environment. EXXON has deep pockets, a superb balance sheet, excellent management and a broad enough downstream infrastructure to be able to explore, then develop, the oil fields, then refine the goo they pump into different products which they market directly to end-users like you and me.

Would I buy the shares of XOM right now? No. But then I bought them for our Growth & Value Portfolio back in June at $59.30 a share. At this point I will be placing a trailing stop – I don’t know how high it can go this time around but I’d like to protect that profit – with the idea of simply buying it back the next time people lose interest in the oil stocks. Will I buy for $59.30 again? Probably not but, then, I’m in the business and watching the markets all day every day, so I can trade a bit more easily. And I don’t mind buying at a higher low and selling at a higher high! If you’d rather play golf or sell cars or do something else with your time, you might just buy and hold. It certainly hasn’t hurt anyone who has done so in the past.

I suggest you also consider ROYAL DUTCH SHELL (NYSE:RDS.B) for your own due diligence. You like big, solid, diversified? You got it here. RD scans the globe for drilling opportunities and spans the globe in refining and marketing finished product. Selling just above $71, up from $40 back in June, it pays nearly 5% and sells at 15 times trailing earnings. You don't get more blue chip than this. Again, I’m holding off on new purchases for now but ten years from now I’ll wager we’d rather have been in RDS.B than out of it.

Three more recent purchases have been France’s TOTAL PETROLEUM (NYSE:TOT), Norway’s STATOIL (NYSE:STO) and Canada’s CENOVUS (CVE.) STO is only up about 3 points from our purchase price and TOT about 5 points. CVE has run a little further, up 10 points already. I’d view any pullback in STO and TOT as a chance to buy brilliant companies and a 5 to 7 point pullback in CVE an excellent entry point. There are plenty of others but you could do worse than to start with STO and TOT and catch the others on any decline. At lower prices, I’d be a buyer of CONOCOPHILLIPS (NYSE:COP) and CHEVRON (NYSE:CVX) too. Having bought BP in the low 30s I’d even buy more of them at that price.

Drillers and Oil Service Companies

Then there are the oilfield services companies. In the oil business, you use up and wear out a lot of equipment and the guys who replace it for you and the guys who rent you the rigs make big money as long as you're looking. Whether you find oil or not, oilfield services firms make money. It's the looking, not the finding, that counts to them.

For the producers and explorers discussed above, I've been able to buy them, sell them at a fine profit and buy them back today at the same price I originally bought them. That's a little more difficult with the service companies -- they keep getting bought out at a premium!

But they are regularly replaced by newer entrants, and often available for less than their true worth. As I wrote back when the BP spill made our government first dither, then over-react to show they were sort of in charge, then dither again, in an article titled BP's Gift to Investors: Cheap Energy Stocks, I noted that just about every driller was knocked down along with TRANSOCEAN (NYSE:RIG), which may or may not have had some culpability for the spill. But I guarantee that DIAMOND OFFSHORE (NYSE:DO), BAKER-HUGHES (BHI), HALLIBURTON (NYSE:HAL), SEADRILL (NYSE:SDRL), GULF ISLAND FABRICATION (NASDAQ:GIFI), ATWOOD (NYSE:ATW), WEATHERFORD INTL (NYSE:WFT) and NOBLE (NYSE:NE) weren’t anywhere in the area, yet investor over-reaction knocked them for a loop, as well! Heck, PRECISION DRILLING (NYSE:PDS) got knocked down a bit and they are a huge land driller.

Today, I am not buying any of these, but we did load up on WFT and SDRL at much lower prices back in September. If I could add to our positions in SDRL anywhere around 30 and WFT anywhere around 18, I’d do it in a minute. Our old favorite KEPPEL CORP (OTCPK:KPELY) has been a “relative” under-performer since the BP mess, rising from 13 to just 18. I’m looking to buy more KPELY on any decline that takes it down even a couple of points. And I’m looking at a couple of other, lesser-known names right now but I have to finish my due diligence on them before I can recommend them for your consideration.

That’s a pretty good start on a two different industries within the larger energy sector. Next up, in Part II, we’ll talk about pipelines, coal and uranium, with maybe a dash of alternative energy firms, as well...

Full Disclosure: We, and/or those clients for whom it is appropriate, are long XOM, STO, TOT, SDRL, WFT and KPELY. And we are buying more if/as they decline as well as the other firms named above on any good declines.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here