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TheStreet Open House

Exxon, Chevron to Extend Gains, Investors Say

BOSTON ( TheStreet) -- Oil prices rallied 20% in the fourth quarter, and integrated oil companies such as Exxon Mobil (XOM) and Chevron (CVX) benefited.

With the economic rebound showing signs of strengthening, oil may go even higher. Exxon broke profit records quarter after quarter in 2008 when oil prices climbed to a record $147 a barrel.

Exxon

"We're seeing a global economic recovery in 2011, and that should help the oil and gas industry," says Dan Neiman, manager of the Williamsville, N.Y.-based Neiman Large Cap Value Fund, which counts several energy- and oil-related stocks among its holdings. "Intuition tells me that as demand increases, prices will go up. And I see demand increasing."

Oil and gas stocks have outperformed the broader equity market over the past three months, with the Dow Jones U.S. Oil & Gas Index rising more than 17% and the S&P 500 adding 8%. That increase has come on the back of rising crude prices. After hitting a low of $64.24 a barrel in late May, oil has rebounded 44% to a high of $92.58 on Jan. 3 and now hovers near $86 a barrel. That's quite a comeback after oil prices plunged to $40 a barrel in the throes of the economic crisis.

Still, not all oil stocks have fared the same. ConocoPhillips (COP) is the big winner, surging 34% last year, followed by Chevron, which climbed 18%. Exxon Mobil, the largest oil company, rose 6.5%, about half that of the S&P 500. Still, fund managers see more room for these stocks to run.

"Energy is a big-picture thing," Neiman says. "It's not just oil and gas prices, but the way the consumer looks at them. Crude oil will go above $100 a barrel. So, we feel this is a good play for us now."

Cliff Draughn, chief investment officer of Savannah, Ga.-based Excelsia Investment Advisors, says oil stocks may be attractive for another two to five years. As an asset-allocation firm, Excelsia owns Chevron and Exxon Mobil and is in the process of buying ConocoPhillips.

Draughn says that as long as governments continue to try to monetize debt by printing money, investors will be on the hunt for a stored value.

"They're not going to get that protection in buying bonds. They're going to get it by buying hard assets or corporations that hold those assets," he says. "I would love to be able to take 10 barrels of oil and put them in my backyard and simply siphon off when it's profitable, but we don't have that luxury as passive investors. We can't go buy a tanker of natural gas or a barge full of oil. As investors, we need to look at the next best alternatives."

Draughn says oil stocks still offer value as well as protection if the broader market sours.

"Keep in mind they're not immune to the market. If the market has a 10% correction, they're going to suffer along with it," he says. "But they suffer a lot less than your Google (GOOG) or Apple (AAPL) or Bank of America (BAC) or Citigroup (C). All things go down with margin calls, but if you're looking for stored value and consistency, commodity-driven companies such as these three are clearly a better play for the low-risk investor."

As an investment manager with $187 million in assets under management with a strong push into commodity stocks, Draughn says he pays little attention to the expectations of analysts on Wall Street. He instead reviews companies' balance sheets when they report earnings, paying close attention to cash flow from operations. He suggests investors perform the same due diligence.

"We look at the earnings, obviously, but we want to look at where the operating earnings came from," he says. "I don't want to see a lot of accounting gimmicks in the earnings. As long as my cash flow from operations is up, I'm a happy camper. It all comes down to their margins and their refining operations and distribution. It comes down to what they still have stuck in the ground out there that they can monetize in the future."

On the next few pages, TheStreet previews these oil stocks and what fund managers are looking for in fourth-quarter financial results from Exxon Mobil, Chevron and ConocoPhillips.

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