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3 Oil Stocks to Buy on a Rally
06/08/2016 9:00 am EST
The price of oil broke through the $51 level this morning and Michael Berger, Associate Editor of MoneyShow.com highlights why oil prices have continued to rally and which energy stocks and master limited partnerships he likes.
The price of Brent crude has rallied more than 85% off of its 2016 lows and this explosive move has helped propel energy stocks.
Oil prices are trading at a 10-month high and has benefited from ongoing supply disruptions in Nigeria and in Canada, coupled with strong Chinese oil demand data.
In May, China oil imports made the biggest year-over-year jump in more than six years.
Recent data has shown that the global oversupply situation has improved and the recent rally was not affected by OPEC’s failed attempt to set an oil production limit. Oil prices have also benefited from a weaker dollar, as a summer rate hike looks a lot less likely following a weak jobs report last week.
Domestic Rig Count Increases as Inventory Drops
Oil prices dropped last week after Baker Hughes (BHI) reported that the domestic oil rig count increased by 9 rigs last week, which is the largest jump since late last year.
Although the rig count has increased, industry data this morning reported a larger-than-expected drop in domestic crude inventory, indicating an easing of the supply glut.
Later today, the Energy Information Administration (EIA) will issue an official inventory report. The market expects commercial crude inventories to have fallen by 3.6 million barrels last week.
Continue to Remain Favorable on Energy Stocks
We have remained constructive on the energy sector and have continued to recommend owning the companies that have the following characteristics: 1) Geographic diversity, 2) Stable and visible cash flow (the more fee-based, the better), 3) Visible growth backlog, 4) Ample liquidity to capitalize on organic and inorganic growth initiatives, and 5) Experienced management team.
Our top picks in the energy sector are the following:
We view Tesoro Logistics LP (TLLP) as one of the highest-quality growth stories in the MLP industry. We expect to see the company’s cash distribution grow by at least 15% every year for the next three years and believe the current risk/reward profile for TLLP is very favorable. Tesoro Logistics has visible growth due to recent accretive acquisitions and dropdowns and offers investors a 6.5% dividend.
Concho Resources, Inc. (CXO) is our favorite exploration and production energy stock due to 1) its premier asset base in the Permian basin, 2) its positioning for another beat-and-raise performance during 2016, 3) balance sheet offers capital flexibility, 4) proven acquisition model, and 5) attractive valuation.
In early January, we recommended Exxon Mobil Corporation (XOM) because we view the company as one of the highest quality energy stocks by low EPS variability. XOM has a strong balance sheet and the company offers an attractive and growing dividend (3.3%). The company can withstand continued oil price weakness better than many of its peers and is very underweight by active managers.
By Michael Berger, Associate Editor of MoneyShow.com
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