How to Pick an Oil Stock

Recently, high gasoline demand has kept refining margins abnormally elevated. To see how this plays out among companies with different resource allocations, look at the recent histories of Marathon Oil (MRO - Cramer's Take - Stockpickr) and BP. At Marathon, 58% of its income comes from its downstream refining business, whereas 14.5% of BP's business comes from its downstream operations.

Marathon's stock has climbed about 10% in the last 12 months, while BP's shares have fallen 6% during the same time period.

Want more? Check out TheStreet.com TV video. Chuck Marvin gives tips on picking oil stocks.

Aside from the national integrated oil companies like Mexico's Pemex, most firms in the group refine more oil than they produce themselves. Those that rely more heavily on refinery operations will generally be more sensitive to refining margins than crude prices, says Jim Williams, an economist at WTRG Economics.

Monitor Geopolitical Risks

Recent events around the globe show just how risky it can be for companies to pursue large E&P projects in hot spots. Royal Dutch Shell (RDS.A - Cramer's Take - Stockpickr) has heavy exposure to geopolitical strife in Nigeria, where rebel groups have forced the company to shut in a 380,000-barrel-a-day field since February 2006.

Alternatively, BP has its own risks in Russia, and recently took a hit when state-run oil giant Gazprom assumed control of its stake in the Kovykta gas field.

Elsewhere, ConocoPhillips(COP - Cramer's Take - Stockpickr) and Exxon recently watched their large investments in Venezuela's Orinoco river region go up in smoke after the Chavez government decided to nationalize production activities there.