Next, predicts Breard, lower oil prices will stimulate global economic growth, and boost oil demand.
Then there’s always the geopolitical wild card — the potential for strikes on oil fields in the Middle East by terrorist groups, or a flare up in the Ukraine.
Like Breard, U.S. Global Investors energy analyst Brian Hicks thinks oil is oversold, given how much it has come down and for how long, compared to previous declines. He thinks WTI can rebound to the $80-$85 range and Brent can return to $85-$90 over the next year or two. “In the long run this oil price is not sustainable, so this is an opportunity to invest,” says Hicks.
The best energy stocks
Hicks favors quality names like Devon Energy
DVN, +2.73% , which he says has low-cost acreage in the Eagle Ford Formation purchased earlier this year, good holdings in the Permian Basin, solid cash flow, and significant hedges in place on 2015 production.
Hicks also likes oil-services companies with high-quality rigs that are let out in long-term contracts, which theoretically protects earnings and dividend yields. One is Helmerich & Payne
HP, +0.13% , which pays a 4.4% dividend yield. Another is Noble
NE, +2.18% an offshore drilling company with a dividend yield close to 10%. Noble looks particularly cheap, trading at half of book value. Noble’s rigs are on deep-water drilling projects, which tend to be less vulnerable to fluctuations in oil prices.
Breard, at Hodges Capital Management, favors North American energy companies that have been hit by the decline in the price of oil — despite the fact that they get a lot of revenue from natural-gas production, or they have the flexibility to shift to natural-gas production.
“I like companies that have optionality and diversification,” says Breard. In this category, he highlights Matador Resources
MTDR, +0.93% which has been aggressively cutting costs, Comstock Resources
CRK, +6.33% , which raised a lot of cash by selling off assets before the sharp decline in energy prices, and Panhandle Oil and Gas
PHX, +9.68% , which gets almost half its revenue from natural-gas production.
Natural-gas prices are likely to hold up in North America for at least three reasons, say analysts at Canaccord Genuity Group. They are: 1) Coal-fired power plants are being shut down and replaced by natural-gas plants; 2) many companies are setting up manufacturing in North America to take advantage of the low natural-gas prices there compared to the rest of the world; and 3) natural gas exports from North America will pick up.
Plus an unexpectedly cold winter would put a bid under natural-gas prices, which is
my own forecast,
Like Breard, analysts at Canaccord Genuity favor companies that tilt towards natural-gas production, or have the option to move in that direction, as long as they have solid financial strength and flexible budgets. In this category, Canaccord favors Suncor Energy
SU, +5.39%Canadian Natural Resources
CNQ, +2.23% Sanchez Energy
SN, +10.34% and Gulfport
GPOR, +3.41% .
Energy analysts at Deutsche Bank favor companies with the balance-sheet strength to survive, but also the budget flexibility, asset quality and performance record to suggest they have the moxie to return to growth when energy prices go back up. Deutsche Bank says companies in this category include Anadarko Petroleum
APC, +2.33% EOG Resources
EOG, +0.15% , Cimarex Energy
XEC, +3.24% and Concho Resources
CXO, +0.65%
The downside risk
How might I be wrong? Well, a lot of smart people disagree with me (and Pickens) about where oil prices are going. If they’re right, the energy stock trade is going to be a dud.
T. Rowe Price commodity-sector analyst Tim Parker concedes oil might be due for a bounce, on a technical basis. “But 2015 looks messy from a fundamental perspective,” he says. The U.S. moves out of the heating oil season in April. U.S. producers could take up to a half a year to cut back, since so many projects are well under way. Iraq is increasing production. Iran could come back on line soon if the embargo is lifted. Major projects are ramping up in the Gulf of Mexico and Brazil.
“You have a lot of places growing supply,” says Parker. “Meanwhile the global economy is not rip-roaring, so demand is skittish. I think we are near a near-term bottom. I just don’t know what 2016 or 2017 will be like.”
Given all the uncertainty, if you buy energy stocks here, you’re going to have to be patient. Sure, there will be asset grabs via takeovers given that energy stocks are so hammered. So you could see a quick pop. On Dec. 12, for example, Talisman Energy
TLM, +48.05% jumped 35% to $4.95 on takeover news.
But for energy contrarians, the best approach will be to buy energy stocks in stages as they bounce around. Accept that you aren’t going to buy the absolute low, and then wait it out.
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