This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Get Ready For $65 (or Lower) Oil

Stocks in this article: XOM CHK XLE UNG SD COP VLO CVX SWN FST BP KOG MRO

For American consumers, prices at the pump are lower. Pump prices have not fallen as fast as oil because of refinery utilization as well as location. Oil refineries on the east coast don't always use the cheaper West Texas crude, but rather the now more expensive Brent North Sea oil.

Energy producers are feeling the impact. I examined Exxon Mobil (XOM), ConocoPhillips (COP), Chevron (CVA), English-based BP (BP) and Valero Energy (VLO), Marathon Oil (MRO), Chesapeake Energy (CHK), Sandridge Energy (SD), Kodiak Oil & Gas (KOG) and Cheniere Energy (LNG).

The major energy stocks really are a mixed bag. S&P Energy Select ETF XLE (XLE) represents energy producers and recently bounced off of lows. XLE appears ready to test the 200-day moving average again.

XLE offers exposure for investors wishing to invest in energy companies without having to pick individual stocks. The volatility is lower than most in the underlying basket and can reasonably be expected to remain relatively more stable. XLE pays a dividend with a yield about 2 percent.

The charts for major oil producers appear much more stable compared to the underlying products like United States Oil ETF USO (USO) and US Natural Gas ETF UNG (UNG).

Natural gas prices went into a free-fall after new methods of extracting natural gas commonly called "fracking" became widely used. Now natural gas prices are well under $3 per million BTUs. The low natural gas prices, normally influenced by oil prices have decoupled.

In April UNG traded below $15 before bouncing back above $18 about a month later and currently trades near $19. I have traded UNG to the long side many times in the last three months. I will buy UNG (via selling covered calls) again on significant dips.

USO is technically oversold slightly, but I am holding off on buying until a parabolic move down occurs. It's an advantage I have as a trader; I believe the odds of a short-term bounce are increasing, which in turn will set up another possible short trade in USO for a longer-term hold.





All companies have international pricing-related exposure, and Europe may continue to drag on earnings but at least provide greater margins. Transportation costs, current shipping lanes and lack of current demand for energy are a recipe for highly variable and localized energy costs.

Exxon Mobil's price-to-earnings multiple is now under 10 for both the trailing 12- month period and forward estimates. Exxon, recently the number one market cap company in the world, has now fallen to "only" $375 billion in valuation.

I believe Exxon is already at a reasonable price for long-term investors, and may soon become a good trading stock too. Even with lower oil prices, Exxon is well-positioned to take advantage of a convergence to natural gas and relatively higher demand from Europe/Asia when it happens. I am holding out for near $70 with Exxon to get long.

ConocoPhillips is slightly weaker from the May 1 spin-off of Philips 66. Chesapeake Energy certainly has its share of news lately. Because natural gas prices are trading at yearly lows, a lot of volatility can be expected, especially in the near-term before demand ramps higher.

Sandridge, Marathon, Southwestern and especially Kodiak and Forest Oil have also taken a hit from the falling energy prices, trading near the lows of the year and/or 52-week lows. While close, I am not yet ready to pull the trigger. I believe the recovery on natural gas prices will take three to five years. Conversion of greater numbers of vehicles will not likely happen without a critical mass of natural gas fueling stations.

As the cost of energy falls, just about every product in the market will have deflationary pressure. Take a box of stove-top stuffing, for example. The actual food product cost is 30% of the cost of energy into putting the box of food on a grocer's shelf.

Lower energy costs equal greater spending by consumers, in turn lifting corporate profits and lifting the economy. energy costs have a high impact on inflation in general and will create headwinds in all commodities including Gold. (Read my Don't Walk, Run Away From Gold, Silver article.)

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication the author did not hold a position in any stock mentioned.
2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs