MILLBURN, N.J. (Stockpickr) -- West Texas Intermediate crude oil prices dropped from a high of $114.80 per barrel on May 2 to a low of $74.90 per barrel on Oct. 4, representing a 35% decline. The Philadelphia Oil Service Sector and the Oil Service HLDRs ETF (OIH) - Get Report declined from high to low during the same period by about 40% each. Since the U.S. markets bottomed in a rather dramatic fashion on Oct. 4, WTI crude has risen by about $10 a barrel.
Clearly the oil service and integrated oil company stocks are highly correlated to each other. WTI at close to $115 per barrel was caused by panic over political uncertainty in the Middle East. The low of nearly $75 per barrel was caused by a strong U.S. dollar and fears of a global recession.
The double-dip theory took a hit when the September labor report indicated that payrolls rose by 103,000 in that month and that another 99,000 were added to the disappointing numbers previously reported for July and August.
A reasonable expectation would be for WTI to trade up to around $90. With that in mind, I see some excellent opportunities in creating a diverse portfolio of
is an integrated oil and gas company, opeating in three segments: exploration and production (upstream), refining and marketing (downstream) and chemicals, transportation and other (midstream). As the price of crude oil rises, so will the realizations (net price earned) in the upstream business. Furthermore, if the likelihood of a recession in the U.S. has diminished, demand for oil and gas by consumers will increase ,helping all of the integrated oil company's income streams to grow.
Domestically, ConocoPhillips is a peer to companies such as
. These three companies are all appealing investments, but what makes ConocoPhillips stand out is its superior dividend of 4.1%, vs. 2.5% for Exxon Mobil and 3.3% for Chevron. Conoco was included in a recent list of
and is one of
Furthermore, in 2010 ConocoPhillips sold its stake in
(LUKOY: Pink Sheets), which has enabled the company to shore up its balance sheet and provide resources for a future acquisition, possibly in the natural gas sector.
Speaking of natural gas, my suggestion in that segment of the industry follows.
is an independent oil and gas company that primarily engages in the upstream and midstream transportation businesses for natural gas. Natural gas remains a weak commodity primarily because of this country's lack of a decisive strategy on expanding its usage.
While natural gas is quite plentiful, environmental concerns connected with the process of extraction through hydraulic fracking means there is little political will from the White House or Senate to develop a comprehensive domestic natural gas policy. I believe that will all change with an increasing desire to create jobs domestically and with the 2012 national elections on the horizon.
In fact, Secretary of the Interior Ken Salazar is expected to issue rules on hydraulic fracking in about a month. These rules should lay out safety measures that the industry must abide by while opening the door for increased drilling activity.
Southwestern Energy has an excellent CEO at its helm, Steven Mueller, and the stock has a superior long-term track record.
is one of the largest oil and gas services companies in the world. The company is an oilfield service provider supplying well services, project management, products and technology to the exploration industry. It has expertise in both offshore and onshore exploration.
Andrew Gould, the longtime and well-respected CEO of Schlumberger, retired on Aug. 1, likely leading to a cautious attitude toward the stock. Fundamentals are strong for Schlumberger; the company beat second-quarter earnings by 2 cents, and third-quarter earnings are expected to rise by 47% to $1.03 a share. A portion of that rise is accounted for by the strategic acquisition of Smith International, which was completed on Aug. 27, 2010.
Schlumberger is experiencing significant demand growth in North America, and activity in the Gulf of Mexico appears to be attracting renewed interest. Pricing for the company's contract is on the upswing. All told, Schlumberger is just too cheap to avoid at these depressed levels.
Schlumberger, one of the
, shows up on a recent list of
Canadian Oil Sands
Canadian Oil Sands Limited
(COSWF: Pink Sheets) invests in oil sands projects through its 36.74% interest in the Syncrude joint venture. Oil sands or tar sands are crude bitumen, which is a form of petroleum that is extracted from sand deposits and turned into what is referred to as synthetic crude. The Syncrude project produces synthetic light crude from the huge Athabasca oil sands in northern Alberta, Canada, a very specialized and unique area of the energy complex.
Canadian Oil Sands does not hedge its production, thus making its output highly correlated and its earnings highly leveraged to the price of light crude. Hence, the stock can be quite volatile.
For the first half of 2011, cash flow from operations totaled C$2.11 per share and net income of C$1.38 per share. (Note that the conversion rate of Canadian dollars to U.S. dollars is about 1:1.) Net income for the first half of 2010 was 86 Canadian cents per share. So far in 2011, the company has paid 60 Candian cents in dividends. I expect full-year 2011 distributions to be greater than C$1.85 paid for all of 2010. All told, I estimate the yield on Canadian Oil Sands to be about 6%.
Kanye Anderson Energy Total Return Fund
Kayne Anderson Energy Total Return Fund
is a closed-ended fund that specializes in investing in master limited partnerships, royalty trusts and income trusts. MLPs are limited partnerships that are publically traded on a securities exchange. As partnerships, these companies avoid taxation on a direct basis and pass on large distributions to limited partners.
This stock, like the entire energy sector, has been beaten up. There have been rumors of tax law changes are they pertain to MLPs, but any changes that I am aware of won't affect shareholders. With a dividend of 8.1%, Kayne Anderson provides great income in a low-income environment while maintaining the upside opportunity as the energy sector recovers
-- Written by Scott Rothbort in Millburn, N.J.
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At the time of publication, Rothbort was long SLB, COSWF and KYE, although positions can change at any time.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of
, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of
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. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.
Mr. Rothbort is a regular contributor to
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website and has frequently appeared as a professional guest on
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and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.
Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.
Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.