Two Ways to Play Higher Crude

05/13/2009 2:00 pm EST

Focus: STOCKS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of Cash Machine, says oil prices are moving higher, and he recommends two stocks he thinks will move up with crude.

Crude oil is a depleting asset in a world that consumes over a million barrels per day. Most of the oil deposits in the world are in geopolitical hotbeds where serious events there can destabilize world trading overnight. Emerging markets are industrializing and pushing up net demand, and oil is seen as an excellent hedge against inflation.

And as the global economy rebounds late this year or next year, demand for energy will rise again, so I believe the price of crude will easily top $100 per barrel again in the next couple of years, and I think we will see oil assets also double in value.

With a market capitalization of $126 billion, BP (NYSE: BP) is easily one of the 800-pound gorillas in the energy sector. Even with oil prices trading at around $50 per barrel, BP's return on equity is still an impressive 22%, and the payout ratio related to it is at 49%, meaning the dividend that is sporting a 7.1% yield is more than covered by two times.

I like buying big oil companies when they are trading with a price/earnings multiple of six times because that tells me the stock is cheap on a valuation basis. And with the shares down 46% from its 52-week high of $77, we can lock in close to an 8% dividend yield and own one of the premier global energy companies.

Provided the company comes close to earning the forecasted $5.49 for next year, the stock should trade at least back up to $50. That would be a 7% move higher. Add the 7.1% dividend and we're looking at a 12-month return of 14%. Buy BP under $45. (It closed above $47 Tuesday—Editor.)

LINN Energy LLC (Nasdaq: LINE) is an independent oil and gas master limited partnership (MLP) with producing basins in the United States. The company's properties are located in the Midwest and California, and its proven reserves stand at 1.660 Bcfe, of which 51% is gas, 31% is oil and 18% is natural gas liquids (NGL).

The average proven reserve life of each well is approximately 21 years.

The company has a superior record of more than replacing production. Plus, the company hedged 100% of production for 2009, 2010 and 2011, and by locking in prices that are more than twice the [recent] price of oil and gas for the next three years, the company can comfortably pay out the stated $2.52 annual distribution, equating to a 14.7% yield. Knowing that the dividend is secure for at least the next 36 months is very reassuring.

My one-year price target for LINE is $22, or 30% higher from its current price [above $16] per share. Buy LINE up to $18.

Subscribe to Cash Machine here…

Related Articles on STOCKS