A defensive stock is one that's either stable or a market outperformer during an economic contraction -- much like the one that oil and gas companies are facing now with oil prices more than half of what they were a year ago.
In what's shaping up to be a "lower-for-longer" scenario for oil prices, brokerage firms are offering up their lists of defensive stocks to get investors through the malaise -- and land in a good position on the other side.
Refining stocks have been on a tear, mostly because low oil prices make for lower feedstocks to run through their facilities. Simmons & Co. International analyst Jeff Dietert offered his top pick: Tesoro (TSO) , which is benefiting in the near term from the extended outage at Exxon Mobil's (XOM) - Get Exxon Mobil Corporation Report Torrance refinery in California, which was damaged in an explosion in February and isn't expected to return to service until late in the first quarter of next year.
He also mentioned HollyFrontier (HFC) - Get HollyFrontier Corporation (HFC) Report, Marathon Petroleum (MPC) - Get Marathon Petroleum Corporation (MPC) Report and Valero Energy (VLO) - Get Valero Energy Corporation Report as top picks. "Healthy free cash and meaningful stock buyback programs make these stocks defensive in a depressed oil price environment," he said.
Analysts at Tudor, Pickering, Holt & Co. Securities said Tuesday their top pick in the battered oilfield services industry is Schlumberger (SLB) - Get Schlumberger NV Report -- which recently agreed to buyCameron International (CAM) for $12.7 billion -- in part because it has the geographic and service and product line breadth to weather the down-cycle ("ideal in a 'defensive' name," the firm said) and still has a shot at getting back toward cycle peak earnings as the next up-cycle eventually unfolds.
The firm adds that there have been some North American onshore-oriented oil service stocks that have surprisingly proven to be highly correlated with bellwether Schlumberger so far during the downturn, including Superior Energy Services (SPN) and RPC (RES) - Get RPC, Inc. Report. Tudor said the companies' balance sheet strength and contract coverage and investors looking for early cycle exposure could all be reasons for the stocks' relatively defensive price behavior.
For those who want some oilfield services exposure but can't own Schlumberger or Halliburton (HAL) - Get Halliburton Company (HAL) Report or its agreed-to acquisition target Baker Hughes (BHI) because of market capitalization constraints, Tudor, Pickering prefers Forum Energy Technologies (FET) - Get Forum Energy Technologies, Inc. Report, Oil States International (OIS) - Get Oil States International, Inc. Report and Nabors Industries (NBR) - Get Nabors Industries Ltd. Report.
Among oil and gas explorers and producers, Topeka Capital Markets analyst Gabriele Sorbara counts Pioneer Natural Resources (PXD) - Get Pioneer Natural Resources Company Report as a more defensive name given its tier-one properties, ample financial liquidity (around $2.75 billion) and strong hedge book (90% of its oil production for the rest of this year and 78% of its oil production next year).
Sorbara said last month the pullback in its shares, the company's vast resources and its net asset value potential make it a takeout target. Other observers say EP Energy (EPE) - Get EP Energy Corp. Class A Report could be in play as well. Either occurrence might turn a defensive play into a touch down.
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