NEW YORK (TheStreet) -- The freefall in oil prices is creating risk -- and opportunity -- for investors. Although there are some obvious moves you can make to limit your exposure, it's important to know who the winners and losers are in the sector.
Here's a brief overview of what to avoid -- and what to add to your portfolio.
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For the first time since 1972, there is no producer cartel dominating the oil market. Prices are therefore free to respond to the law of supply and demand and, with the fracking revolution having hugely increased supply, they will thus remain much lower than in recent years.
That's bad news for the U.S., which with fracking and offshore oil has become a major high-cost oil producer, vulnerable to prolonged price weakness. There are winners as well as losers, however, and wise investors should deploy resources out of their oil production holdings into sectors that seem likely to gain from the change.
With cheap oil locked in, all oil producers are a sell, especially high-cost oil producers in fracking, shale and the deep sea. Although the integrated oil majors such as Exxon Mobil (XOM) and Chevron (CVX) have a broad spread of production and refining, Suncor (SU) , which specializes in high-cost oil from Canadian tar sands, and Petrobras (PBR) , which has a hugely expensive offshore drilling program, are unlikely to prosper.
Oil-service companies are also in trouble, especially if leveraged. Seadrill's (SDRL) 23% price drop when it unexpectedly eliminated its dividend is just a foretaste of what's to come. Thus, the Halliburton (HAL) takeover of Baker Hughes (BHI) is defensive and will end by reducing capital in the sector. Fracking-supplies companies such as U.S. Silica (SLCA) are also endangered.
Pipelines, especially contained in Master Limited Partnership structures are a better bet, because low prices increase demand, thus increasing usage. Pipelines connected to high-cost sources such as the Alberta tar sands are probably uneconomic today, however. I'd be very surprised now if the Keystone XL pipeline is actually built.