How to Pick an Oil Stock

Updated from 6:30 a.m. EDT

With oil prices still hovering around the $70-a-barrel level, it's no surprise that investors are throwing loads of money at oil companies.

Most of the time that means banking on the integrated oil group, the enormous multinationals like Exxon Mobil (XOM Quote - Cramer on XOM - Stock Picks), Chevron (CVX Quote - Cramer on CVX - Stock Picks) and BP (BP Quote - Cramer on BP - Stock Picks). They are involved in all aspects of the oil and gas business, from the wellhead all the way to the gas pump.

Realizing that there is growth potential in energy is easy. The difficult part is choosing which firms are good investments and which ones should be avoided. Since integrated oil companies share similar business models, it can be tough to choose the stock in the group that offers the best value.

However, analysts say there are some clues that can help investors make the best decision. Some are easy to grasp, others require a little more homework, but all will serve to educate.

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Crude Isn't Everything

To start, don't focus only on commodity price movements. Integrated oil companies have diversified cash flows from different businesses. Not only do they make money by pumping fossil fuels out of the ground, they also profit from refining those fuels into chemicals and petroleum products and then selling those goods in the retail market.

	What metrics do you focus on when picking an oil stock? Answer Here

Their drilling projects tend to have longer life-spans than those of smaller E&P companies, and they often reduce the volatility of their cash flows by hedging thoroughly.

Thus, it isn't necessary to buy and sell integrated oil stocks as commodity prices move, says Sheraz Mian, an analyst at Zacks Investment Research. These companies can make money regardless of what prices are doing.

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