Oil prices hit a record low on Tuesday, declining for the third successive day following a crucial decision by the Organization of the Petroleum Exporting Countries (OPEC) on Friday. The oil cartel’s decision to maintain its production ceiling led to a drop in prices on Tuesday as well. As a result, oil prices have suffered heavy losses and investors and key investors are hurrying to exit the sector.
Some market watchers believe that you should exit the oil and gas space entirely. Others believe that the slide in prices may have led to good value picks becoming available at attractive prices. This is particularly true for refining and some pipeline companies. It would be a good idea to select some of these at a time when stock prices have plunged.
OPEC Retains Production Ceiling
Last Friday, OPEC decided to maintain a production ceiling, which reflects the “current actual” output. In fact, the international cartel of oil producers decided to raise the ceiling of daily production from the prior level of 30 million barrels to 31.5 million barrels. The cartel was considering an output cut during the 7-hour meeting last Friday, but found that lowering of output only by the OPEC members will not be enough to lift oil prices.
As a result, prices of West Texas Intermediate (WTI) crude oil and Brent crude oil dropped 2.8% and 1.9% to $39.97 a barrel and $43 per barrel, respectively. Consequently, key stocks from the energy sector such as Occidental Petroleum Corporation OXY and Kinder Morgan, Inc. KMI decreased 0.9% and 12.7%, respectively on Friday.
Decision Leads to Record Low
Losses for the sector flowed over into Monday, hurting the broader markets. Exxon Mobil Corp. XOM and Chevron Corp. CVX dropped 2.6% and 2.7%, respectively.
In a volatile trading session on Tuesday, both the WTI and Brent crude oil closed at their lowest settlement prices since Feb 2009. Price of WTI crude oil dropped 0.4% to $37.51 a barrel, while Brent crude oil declined 1.2% to $40.26 a barrel. Price of WTI crude oil dropped 0.4% to $37.51 a barrel, while the Brent crude oil declined 1.2% to $40.26 a barrel. Exxon Mobil and Chevron dropped 2.8% and 0.9%, respectively.
Meanwhile, U.S. stockpiles have increased for 10 weeks in a row at the onset of winter when supplies usually decline. Further, the U.S. Energy Information Administration expects crude production of 9.33 million barrels a day for this year, up from an earlier estimate of 9.29 million barrels. These factors have sparked concerns about oversupply of oil.
Refiners, Pipelines Remain Good Choices
According to Fitch Ratings’ 2016 Outlook, refiners will have relatively unchanged credit profiles next year. The agency believes that solid cash flows and strong overall financial positions of the sector will remain unchanged in 2016.
This is because the likes of Valero Energy Corporation VLO are utilizing information technology and adapting quickly to the evolving situation. Computer algorithms, wireless networks and sensors are being used to accurately gauge demand levels. This in turn is leading to more efficient energy product management as refiners quickly identify which kind of oil is profitable at a particular point in time.
Meanwhile, pipeline companies are also somewhat isolated from the price plunge. This is because contracts of pipelines are not linked to oil prices. Even if there are breakdowns in supply if some producers shut shop others are likely to fill that space. And if such disruptions are strong enough, prices could see an uptrend.
That’s why it makes sense to pick up these stocks even though they are being hurt drastically right now. Eventually, the market will come around to the fact that they are attractive propositions at current prices.
Our Choices
Despite the dramatic and continuing slump in the oil and gas sector, it would not be correct to drop all of these stocks from your portfolio. In fact, it would be a good idea to pick up some of these at low prices.
In this instance, refining and pipeline companies are particularly good propositions. Adding some select stocks of this kind to your portfolio at this time may be a good option.
Our selection is also backed by a good Zacks Value Score and Zacks Rank.
We narrowed down our choices with the help of our new style score system.
Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.
HollyFrontier Corporation HFC is a Texas-based company engaged in refining petroleum.
HollyFrontier holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 9.20, lower than the industry average of 11.74. It has a PEG ratio of 0.94, lower than the industry average of 1.01.
Northern Tier Energy LP NTI operates in the downstream energy space and is involved in refining, retail and pipeline operations.
Northern Tier Energy holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’. t has a P/E (F1) of 5.69 as compared to the industry average of 15.76. It has a PEG ratio of 0.61, lower than the industry average of 1.22.
PBF Logistics LP PBFX engages in owning, leasing, operating, developing and acquiring crude oil and refined petroleum products terminals, pipelines, storage facilities and similar logistics assets.
PBF Logistics holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘B.’ It has a P/E (F1) of 8.74 as compared to the industry average of 17.02. It has a PEG ratio of 0.95, lower than the industry average of 2.23.
CONE Midstream Partners LP CNNX owns, operates, develops and acquires natural gas gathering and other midstream energy assets.
CONE Midstream Partners holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’ It has a P/E (F1) of 9.27 as compared to the industry average of 17.02. It has a PEG ratio of 0.21, lower than the industry average of 2.23.
Boardwalk Pipeline Partners, LP BWP via its subsidiary companies offers interstate transportation and storage of natural gas in the U.S.
Boardwalk Pipeline Partners holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘B.’ It has a P/E (F1) of 14.10 as compared to the industry average of 17.02.
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