The key for energy investors now is patience — don’t be tempted to chase momentum. Bear markets always include large rallies that trap investors to buy at exactly the wrong times, asserts Elliott Gue, resource sector expert and editor of Energy & Income Advisor.
Our research supports three key findings. First, we’re in the early stages of an energy and commodity supercycle driven by massive underinvestment in new supply.
Second, energy is likely to significantly outperform the broader market through the coming bear cycle and pullbacks are likely to be far shallower than for the general market. And, third, energy is likely to emerge as a leadership group in the next big bull market.
SLB (SLB) — the oil services firm that was previously called Schlumberger — remains a top pick for us through the current cycle. I know most of you already own it but you should look to accumulate it on dips below $47.
If we get a panicky market sell-off that takes the stock to $30, that’s an outstanding opportunity to load up on this name. Longer term, I see SLB revisiting at least its 2017 peak at $80 — after all, by the end of next year SLB will be growing faster than it did in the last cycle, will have higher profit margins and higher revenues.
Exxon Mobil (XOM) is another large cap winner — it’s jumped of late but traded below our recommended buy price of $85 as recently as the end of September. We’d wait for dips under that level to accumulate more.
XOM has arguably then best production growth profile of any of the large super oils and had the foresight to invest in new supply when prices were low. It’ll reap the benefits of those investments in the form of higher production and cash flows through the coming supercycle.
Chesapeake (CHK) is a solid gas-focused name to buy here in my view. The company is now focused on two of the most promising gas plays in the US — the Haynesville in Louisiana and Appalachia’s Marcellus.
I’m particularly impressed with how the stock has remained firm despite the big sell-off in gas — the stock is a buy under $110 and should yield in the high single to low double digits even with gas averaging close to current levels over the next 12 months.
Finally, refiner Valero Energy (VLO) is an underappreciated beneficiary of the current energy cycle. Global refining capacity has been crimped by a combination of weak profitability for much of the past 5 years and government policy/resistance to new refinery builds and expansions.
The result: there’s a dearth of refining capacity that’s arguably just as acute as the dearth in oil supply. That’s bullish for Valero and I’d recommend buying dips below $105.