Top Picks for Energy Gains

02/28/2017 7:00 am EST

Focus: STOCKS

Christian DeHaemer

Investment Director and Editor, Crisis and Opportunity

The deal with oil is that it is cyclical. When it bounces back, the first thing investors buy is the deep value plays among the producers, explain energy sector specialist Christian DeHaemer, editor of Energy & Capital.

In 2016, the low cost/high value was in the Permian Basin in West Texas. Last year there were over $20 billion in Permian acreage buyouts. Some Permian stocks have tripled in value.

The Permian Basin is simply the low-cost U.S. field. You can pull oil out of the ground at $30 per barrel. The U.S. is benefiting from the strong dollar, advanced technology, new export laws, and because it is not subject to OPEC agreements.

After investors buy the low-cost producers, they turn to the service companies. These include names like Schlumberger (SLB), Baker Hughes (BHI), Fairmount Santrol Holdings (FMSA), and Nabors Industries (NBR).

All of these stocks should see earnings rebound over the next three quarters. Schlumberger is the "best of breed" in regards to five-year trends in margin, cash flow, and value.

The VanEck Vectors Oil Services ETF (OIH) is also a way to play the oil service sector, though it has some foreign and offshore holdings as well.

The oilfield service sector assists the drilling companies in setting up oil and gas wells. These companies manufacture, repair, and maintain equipment used in oil extraction and transport.

They also do things like seismic testing and transport services, as well as more sophisticated well development, drilling and planning fracking flows, etc.

We are now at a point where companies are spending money, increasing capex, and ramping up production. If you think oil will head back above $70, you want to look at offshore contract drillers like Transocean Ltd. (RIG), which traded at $55 in 2013 and is now trading at $13.09.

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