NEW YORK (TheStreet) -- It's that time of year again -- time to list favorite energy stocks for the coming year.
First we should ask why one would even want to invest in the energy sector. The answer is simple: Energy is the one absolute requisite for global growth, and production costs increase every year. Those two truths must drive energy stocks to outperform other sectors in 2012, just as they did in 2011.
But where to look? There are hundreds of stocks in what I would call the energy sector. For this article I'm going to keep it simple, offering two choices in mega-cap integrated oil companies, a couple in oil services and some speculative stocks.
: These are the behemoths of energy. These companies engage in all types of exploration for and production of crude oil, natural gas and liquids. They have assets dotting the globe, transportation services, downstream refining and retail sales systems.
Although volumes -- that is, production -- have decreased a bit, there is still value in these monsters for the simple reason that they produce and provide so much of the energy that the world uses.
Of the biggest four or five multinational integrated oil companies, my favorite remains
The company's dominance will pay off if natural gas finally finds a floor and Exxon's stock buybacks and steady dividend make it the oil stock for pure buy-and-holders.
is a close second. This is a
darling that will benefit from its spinoff of refining assets some time in 2012.
Conoco also continues to pay a consistent and reliable 3.75%. Note that COP has underperformed the rest of the sector recently. Correlations are normally so close that such an underperformance by one stock can point the way to value.
: Oil services are the best place to invest in the entire energy sector, because every barrel of oil extracted today was marginally more difficult and expensive to get than it was yesterday. And that trend looks inexorable.
That does not mean that I believe there is necessarily a supply constraint in energy right now, only that the technology of extraction continues to get more complex.
continues to lead the sector, particularly outside the U.S. in the growing markets for vertical drilling. Schlumberger remains my favorite. Another smaller company to look at with growing work in complex procedures is
Helmerich & Payne
: For me, a speculative stock offers the potential to at least double in the next 12 months, but it also carries lots of downside risk.
In energy, one such stock springs quickly to mind:
. RIG dominates deepwater drilling floaters, but the company is on the verge of drifting into junk bond territory, and it has court cases pending that will define its financial responsibility for the Macondo disaster of last year.
Still, in 2008 RIG shares traded for $160. Back then oil prices were not much higher than they are today and daily rig rates weren't much different. RIG trades for about $42 a share today.
Another speculative idea might be trying to gain exposure to the exploding development of the Bakken or Permian basins with smaller-cap explorers and producers such as
Cabot Oil & Gas
. But both are richly priced already, and you are mostly wagering on a takeover bid -- not normally an easy pick to make.
So there you have it: my picks for 2012 in energy. What's most important to remember is not the specific picks but the thesis that energy should continue to outperform the rest of the stock market. Using that thesis, you should look for your own investment ideas.
At the time of publication, Dicker owned XOM, COP, SLB, HP, RIG.