I bet that headline caught your attention. That's just about all these attention grabbing predictions of $240 to $300 oil are good for. People who write about oil going over $200 are full of nonsense. It's extremely unlikely that oil will be trading for over $200 on any kind of sustained basis in the near future. The main reason is that there is no historical support for prices to go that high, and there is absolutely no way the world economy could handle it. There are few events that could even get oil that high, such as having the Suez Canal blocked, but that would not last long. At $200+, our economy would come to a grinding halt and if that happened, oil would quickly drop back. When oil was around $140 per barrel in 2008, the world economy was booming by today's standards. Even with a much stronger global economy, we saw real demand destruction when oil was at $140, so you can just imagine what $140, $200 oil, or more would do right now.
There are real signs that the economy is already starting to feel the pinch of oil even at $105 per barrel. Consumers have historically cut back on all types of spending and driving when oil approaches the $4 per gallon level which is where we are at now. Famed investor Doug Kass said oil prices are pushing the recovery near a tipping point here. I bring all of this up because most energy related stocks have seen nice gains lately, and it's important to consider this before making any new investments in the energy sector. The world economy appears to be generally improving, and I think exposure to oil is a must for investors in the long run. However, I have been selling some energy stocks into this rally, and I am waiting to buy certain names back when oil dips under $100. Below, I also point out a few highly speculative stocks with minimal or no earnings, which I continue to see as too risky for long term holdings, although money can be made (and lost) trading them due to their high volatility.
My favorite major oil company is Total (NYSE:TOT) which is based in France and trades for about $60. Total has a strong balance sheet which as of December 31, 2010 had roughly $19 billion in cash and cash equivalents. Total reported fourth quarter profits of about $1.54 per share and 2010 profits of about $6.08 per share. TOT earnings estimates are around $7 per share for 2011. The dividend yield on TOT is about 4.5%. I would buy this when the stock and/or oil corrects.
Exxon Mobil, Inc. (NYSE:XOM) shares trade for $82.73, the dividend is $1.76, the yield is about 2.1%. The earnings per share estimate is $7.17 for 2011 and $8.09 for 2012. I would buy XOM on corrections.
ConocoPhillips (NYSE:COP) shares trade for $79.70, the dividend is $2.64, the yield is about 3.3%. The earnings per share estimate is $6.84 for 2011 and $7.77 for 2012. I would buy COP on any significant corrections.
Chevron Corp. (NYSE:CVX) shares trade for $105.38, the dividend is $2.88, the yield is about 2.8%. The earnings per share estimate is $10.64 for 2011 and $11.58 for 2012. I would buy CVX on corrections.
Occidental Petroleum Corp. (NYSE:OXY) shares trade for $99.79, the dividend is $1.84, the yield is about 1.8%. The earnings per share estimate is $7.30 for 2011 and $8.74 for 2012. I would only buy OXY on a major correction.
And here are the higher risk, speculative names that I wrote about in the past. I warned investors to be wary of these names due to the frothy run up in these stocks. You can read that article here. These names corrected significantly in the days after I wrote the article, and I continue to think that rallies in these names are great opportunities to sell into strength. Before anyone assumes that I only invest in large cap oil stocks, I can tell you that there are a couple of small cap energy stocks which I am invested in, but they are not the names discussed below. Here are the risk names I would sell on rallies:
Kodiak Oil and Gas Corp. (NYSE:KOG) hit a new 52 week high recently at $7.70 and now trades for $6.70. These shares have risen from a 52 week low of $2.43. The 50 day moving average is $6.41 and the 200 day moving average is $4.62.
Samson Oil and Gas Corp. (NYSEMKT:SSN) hit a new 52 week high recently at $4.75, but have dropped to about $4. These shares have risen from a 52 week low of about 37 cents to nearly $5! The 50 day moving average is $2.91 and the 200 day moving average is $1.59.
Abraxas Petroleum Corporation (NASDAQ:AXAS) are trading at $4.95, well below the $6.16 level when I first wrote about this stock. These shares have risen from a 52 week low of $1.85 to over $6. The 50 day moving average is $4.95 and the 200 day moving average is $3.64.
Royal Energy, Inc. (NASDAQ:ROYL) hit a new 52 week high recently at $7.90, but now trades for about $6. These shares have risen from a 52 week low of about $1.76 to nearly $8! The 50 day moving average is $3.82 and the 200 day moving average is $2.54.
Blue Dolphin Energy Co., (OTCQX:BDCO) hit a new 52 week high recently at $9.09, but have since dropped to about $7. These shares have risen from a 52 week low of less than $1 to over $9! The 50 day moving average is $4.30 and the 200 day moving average is $2.66.
Delta Petroleum (DPTR). These shares are trading at 88 cents and have a 52 week range of 67 cents and $1.95. The 50 day moving average is 85 cents and the 200 day moving average is 81 cents. These shares are trading close to support levels. This company has too much debt in my opinion, but now that these shares have corrected, this is one of the few of the small caps discussed here that I would consider trading.
If some normalcy returns to the Middle East in the coming weeks, oil should drop significantly, so investors should be careful about starting new positions in energy stocks after the great run they have had. Also, when you start seeing articles about how oil is possibly going over $200 per barrel, it's probably a better time to be selling into this rally rather than buying it. Personally, I am positioning my portfolio for the next buying opportunity when oil possibly dips back under $100, not for $140, $240, or $300 oil.
The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.