How to Pick an Oil Stock

According to Morningstar analyst Elizabeth Collins, all integrated oil companies are subject to some level of geopolitical risk, considering how much crude is found in volatile areas like the Middle East and the regions mentioned above. The key for the companies is to keep those risks diversified, and also that they be compensated for the chances that they choose to take.

As a corollary, compare strategic positioning and asset quality. As spare capacity of fossil fuels declines around the globe, any edge in assets one company has over its competitors becomes key.

Mark Gilman, an analyst at Benchmark Company, recommends that investors pay attention to companies' positions in up-and-coming areas like liquefied natural gas and oil sands. He also says that the quality of a company's assets is important, especially in the downstream business. For instance, how up-to-date are a company's refineries? What kind of utilization rates is a company clearing? Or have a company's assets recently seen significant downtime due to unscheduled maintenance?

Who's the Boss?

Finally, take note of a company's management team. Given the ever-increasing demand for energy sources around the globe, the growth outlook for integrated oil companies as a group looks peachy. But to be comfortable with an investment, Mian suggests finding a company with a management team you have confidence in.

A solid team of executives will be able to navigate the complex geopolitical chessboard of energy and leave you better off than where you started.

Gilman takes the idea of management strength further, saying that investors should get into their heads and understand how executives think about their business and strategy, whether that's mergers, share buybacks, capital expenditures or commodity price hedging.

If management doesn't discuss these issues in their financial reports and conference calls, they're probably still looking for the right answers. And that's a sign you should stay clear.

Oil prices were losing ground in Tuesday's market, and so were the stocks. Exxon Mobil was recently falling $1.10 to $84.02, Chevron was losing $1.40 to $85.60, and BP was down $1.34 to $65.37. ConocoPhillips was down $1.18 to $79.80, Marathon Oil was losing $1.58 to $51.27, and Royal Dutch Shell was slipping $1.04 to $74.22.

Interested in more oil plays? Check out this portfolio from Cramer on Stockpickr. And there's this portfolio from oil tycoon T. Boone Pickens, who's made waves with his "Peak Oil" theory.

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