Volatility is inherent to the energy sector. The vulnerability of underlying commodities – oil and natural gas – to the broader economy is evident from inevitable price fluctuations when key issues hit the market. And with geopolitics running hotter, the crisis has also hit oil stocks. This is evident from the performance of half a dozen energy behemoths, or so-called "big oil."
Over the past month, the big oil players on average lost 1.28% of their market value. Of this, the biggest loser was the largest publicly traded oil and gas company Exxon Mobil Corp. (XOM) which shed 3.28%. British energy giant BP plc (BP) followed Exxon closely with a 3.06% drop.
Stronger Economy, Weaker Oil
According to the Bureau of Economic Analysis’ advance estimate, U.S. GDP grew at a 4.0% rate in the second quarter, rebounding from a revised 2.1% decline in the first quarter. Signs of recovery in the U.S. economy, however, brought their fair share of woes for oil.
As a stronger dollar lifts the price of crude as a commodity in the international market, it thereby limits its demand. Also, the proposed hike in Federal interest rates to pull up the greenback has resulted in a more pronounced flight toward U.S. government bonds and bond proxies. In the country’s oil market, this flurry of bonds has sparked concerns about the future direction of crude price and threatens investor sentiment.
Oil Prices at a Crossroads
A stronger greenback creates a vicious circle for oil price by making imports cheaper at a time when bearish inventory data are creating demand worries. The future of oil price is further wrinkled by the U.S. Energy Information Administration prediction that by 2015, imports of crude oil and refined fuels should fall to an average of just 21% as U.S. shale oil production increases. By contrast, imports accounted for about 40% of the total domestic consumption in 2012.
Subsequently, we have seen weakness in the overall price trend of oil, which resulted in the West Texas Intermediate (WTI) crude futures witnessing a declining trend over the past three months, with prices currently hovering at around $92 per barrel. Similarly, natural gas price is also skewed to the lower end of $4 per million Btu (MMBtu).
Why Bet on Oil Now?
In such a scenario, the general consensus might be to veer away from oil stocks. However, with almost the entire spectrum of oil stocks witnessing a fall, we feel that the sector may soon start to stabilize. After all, we must not forget that the outlook for oil price during 2014 is tied to the global GDP growth forecast. In 2013, we couldn’t get bullish on oil (beyond the $95 a barrel), until we saw GDP growth in European countries and a step-up in China. Subsequently, oil supply fundamentals are improving in 2014 and 2015 on North American production. In June 2014, geopolitical risks kept WTI oil above the psychological $100 a barrel.
Any geopolitical disturbance in the global supply chain could soon flare up the demand for oil. This scenario is still prevalent in two pockets of the world, namely Russia and the Middle East. Add to this the bargain prices now offered by quite a few oil stocks that have witnessed heavy selling without any relation to fundamentals. Thus, a contrarian opportunity is now present for investors to build positions in those stocks of the oil and gas sector which have been pushed to the oversold and bargain levels.
Winners Affected by Panic Selling
Identifying the best stocks in the oil and gas space for one's portfolio is no easy task. But one way to narrow down the list during this heavy selling season is by looking at stocks that have a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) – but that have been hammered by panic-selling among investors. After all, why not hold stake in companies for which earnings estimates are rising?
Here are three such stocks:
North Atlantic Drilling Limited (NADL)
Based in Hamilton, Bermuda, North Atlantic Drilling Limited (NADL) offers offshore drilling services to the oil and gas industry primarily in Norway and the United Kingdom. The company provides drillships, semi-submersibles, jackups, harsh environment and ultra-deepwater units.
The stock holds a Zacks Rank #1 (Strong Buy) and has lost nearly 11.69% over the last 4 weeks. At the same time, the Zacks Consensus Estimate for 2014 has gone up by nearly 3.6% in the past month.
Superior Energy Services, Inc. (SPN)
Houston, TX-headquartered Superior Energy Services, Inc. (SPN) is engaged in the business of providing drilling, completion and production-related needs of oil and gas companies worldwide through its branded drilling products. The company also provides integrated completion and well intervention services and tools, supported by an engineering staff planning and designing solutions for customers.
This Zacks Rank #2 stock and has lost nearly 3.58% over the last 4 weeks. Panic sellers have overlooked the fact that the Zacks Consensus Estimate for 2014 has gone up nearly 0.19% in the past month.
PowerSecure International, Inc. (POWR)
PowerSecure International, Inc. (POWR) is a leading provider of utility and energy technologies to electric utilities, and their industrial, institutional and commercial customers. This Wake Forest, NC-based company has a long-term earnings expectation of 30.0%.
The Zacks Rank #1 and has lost nearly 10.67% over the last 4 weeks due to panic selling. However, the market following the pack has overlooked the company’s focus on its core business, operational improvements and new order awards that have led to rising order backlog.
Bottom Line
The economics of oil and gas supply and demand, coupled with the strength of the economy, is the fundamental driver of the sector. Previous strength in commodity prices was fueled by strong demand in varied pockets of the globe from China to the U.S. The near-term weakness of crude is only a temporary phenomenon as a single geopolitical incident to the strengthening of Chinese demand can shoot up prices again beyond the psychological barrier of $100 per barrel.
As such, contrarian investors should bet on outperformers backed by a solid Zacks Rank and positive earnings revisions and growth. Investors looking to veer from the Fed rate decision this Wednesday should be on the lookout.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment