Fallen Angels for Energy Returns

02/11/2016 7:00 am EST


Jim Powell

Principal Analyst, Global Changes & Opportunities

I continue to think the best opportunity for blood-in-the-streets profits is with top quality oil stocks; indeed, I’ve rarely seen such a vital industry battered so badly, asserts Jim Powell, editor of Global Changes & Opportunities Report.

Oil is a fallen angel play that’s as close to a long-term slam dunk as Wall Street ever offers. I think oil prices are close to a bottom and should start to rebound later this year.

Whenever an oil rebound happens, investors who miss it will moan, “How could I have been so blind not to have seen that such an important sector would recover?”

Exxon Mobil (XOM)

I have previously recommended Exxon Mobil for long-term investors in search of bargains. I continue to do so. The stock currently yields 3.94%, a level that we almost never see for this stock.

Because Exxon Mobil is in so many institutional portfolios, the company is unlikely to cut its dividend. In fact, the payout has been increasing in recent years.

If you want a low risk energy stock with lots of cash and a diversified business, you need to look no further than XOM.

Cheniere Energy (LNG)

Investors who are comfortable with somewhat more risk should consider Cheniere Energy. This innovative exporter of US shale gas has moved to Wall Street’s black list because gas prices plummeted along with oil.

Before gas prices dropped, however, Cheniere signed long-term sales contracts with its customers in Europe and Asia.

In any case, by the time the company’s new liquefaction plants come online, gas prices will probably be on the mend.

Exxon Mobil and other large oil companies failed to anticipate the huge foreign demand for US shale gas. It was an expensive oversight.

To catch up, oil producers can either start a 10-year program to create their own liquefaction plants or they can buy Cheniere and be in the market right away. I think there is a good chance we’ll see a buyout bid for Cheniere.

National Oilwell Varco (NOV)

If would like an energy stock with lottery potential, I recommend National Oilwell Varco, a leading provider of drilling equipment and supplies to exploration and development companies.

The oil drilling industry will be slower to turn around than the energy producers because many exploration projects are being cancelled. Not surprisingly, Varco’s stock has fallen sharply.

However, at the first indication that oil prices will start to recover within a year or so, I think Varco will begin a truly exceptional recovery. Meanwhile, it has a lot of cash and can wait out the oil price storm.

With its sweet 4.8% dividend yield and low 9.4 P/E, investors can also afford to wait for the turn. Varco seems particularly well suited for an IRA or a family trust.

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