5 Stocks for Peak Oil
MINNEAPOLIS (Stockpickr) -- Prior to the market falling off the cliff in 2008, commodity markets rallied heartily. For example, the oil market absolutely exploded in 2007. Traders, hedge funds, and investors in exchange-traded funds helped push oil to a peak price of nearly $150 per barrel.
In 2011, I'm expecting the oil trade to follow a similar trajectory higher. With oil now approaching $100 per barrel at the end of 2010 the stage is set for more gains. Within that construct there are many different ways to play the next
.
For investors, one particular area of note is the oil drillers. The
BP
(BP) oil spill in the Gulf of Mexico did that market no favors. Daily images of oil seeping into the ocean resulted in that segment of the market to take a giant step backwards.
Of course, in the absence of a real alternative to crude oil, if the U.S. wishes to reduce its dependence on foreign oil, we really have no choice but to increase or drilling off-shore.
Stocks of off-shore drillers have recovered some since the summer oil spill debacle but are undervalued in my opinion. If oil takes another run at $150 per barrel, the drillers will be the best performers in the oil patch.
It won't take much to spark a big rally in oil prices. We now have government stimulus in the form of tax cut and unemployment benefit extensions. Those extra dollars will give the economy lift creating demand for crude.
It will also be inflationary, and as a result investors will blindly plow into the oil trade just as they did in 2007. For those that wish to profit on this expectation, the time to buy oil stocks is now.
Here are
.
Transocean
(RIG) - Get Report
Front and center of the BP oil spill was Transocean. It was the company's oil rig that exploded, causing oil to gush into the Gulf of Mexico. Shares lost a third of their value in the aftermath of the accident but have since recovered.
The initial concern was that Transocean would be heavily liable for the damage done by the man-made disaster. With British Petroleum stepping up to the plate and oil no longer spilling into the Gulf, investors feel comfortable owning Transocean.
That said, shares at just around $70 still trade below earlier highs around $90. Its valuation is attractive, and with oil prices going up, I think investors can find a bargain here.
Atwood Oceanics
(ATW)
Another stock losing a third of its value during the initial aftermath of the spill was Atwood Oceanics. Although the stock has rebounded, the shares remain attractive. If you include the fact that oil is slowly approaching $100 per barrel again, the attraction is all the more apparent.
Atwood trades for less than 10 times trailing and forward earnings. Those earnings will likely be higher in 2011 if oil makes another run at $150.
Multiple expansion plus earnings that are higher than expected creates an opportunity for outsized gains for investors in Atwood Oceanics.
Apache
(APA) - Get Report
Apache is a global oil and gas company with significant proven reserves on properties across the world. Higher oil prices make those reserves more valuable in 2011.
Shares have rebounded significantly over the last few months, with the company gaining some $30 in value in the second part of 2010. Those gains give me pause in selecting the stock here, but I like the fact that the company has exposure to the
as well. Nat gas prices have not done nearly as well as crude prices, but many expect that to change in the near term.
Apache still trades below its 2008 peak of approximately $140 per share. If natural gas rises in tandem with crude in 2011, I expect Apache to move well above prior highs. The worst I would expect with the stock is for shares to trade sideways. At a minimum, oil and natural gas stay right where they are in the next year.
Chevron
(CVX) - Get Report
A more conservative approach to playing the expected increase in oil prices is with giant oil complex Chevron. In addition to its valuation being cheap, Chevron pays out a portion of its huge cash flows in the form of a
to shareholders. That dividend yield is nearly 3.5%.
At a current price of $86 per share, Chevron trades for 10.3 times trailing earnings and 8.9 times forward earnings. This stock is way too cheap. It won't be in the not-too-distant future. We've already seen shares pop $20 in the second half of 2010. Expect more of the same during the first half of 2011. I see Chevron trading at $120 before next summer.
Devon Energy
(DVN) - Get Report
If you're looking for a takeover play in the oil industry, then you might consider Devon Energy. One of the largest independent oil companies operating mostly in North America, Devon shares are attractively priced, and its ownership of prime oil and natural gas properties make the company a prime target for a larger player looking to boost its reserves.
At the last run at peak oil, Devon traded for approximately $120 per share. Investors can buy the company today for less than $75.
One might argue that $120 was a bubble price. That very well may be, but we are at the start of a new business cycle, whereas the last bull run in oil took place at the end of a bull market. This time, the gains will be sustainable, making Devon an attractive acquisition target.
To see these stocks in action, check out the
portfolio.
-- Written by Jamie Dlugosch in Minneapolis.
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At the time of publication, author had no positions in stocks mentioned. Jamie Dlugosch is a founder and contributor to
MainStreet Investor
and
MainStreet Accredited Investor
. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to
The Rational Investor
,
The Prudent Speculator
,
Penny Stock Winners
and
InvestorPlace Media
.