Investing in Oil
For those with a more speculative bent and the proper trading accounts, oil prices can be played directly in the futures markets, targeting either the crude or gasoline futures contracts.
For long-term investors, however, a more comfortable choice would likely be an investment in an oil price linked exchange-traded fund (ETF). Two in particular are worth a look:
United States Oil Fund LP (NYSE: USO), recent price $34.74 - This fund invests in various exchange-traded futures contracts for crude oil, heating oil, gasoline and other petroleum products, as well as options and forward contracts, seeking to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light sweet crude oil. The fund's expense ratio of 0.78% is below the average for funds of this type. The fund has $2.15 billion in assets and the 52-week price range has been $30.93 to $42.19.
iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL), recent price $22.60 - Actually an ETN (exchange-traded note) rather than an ETF, this fund attempts to track the performance of the Goldman Sachs Crude Oil Return Index, which seeks returns based on the unleveraged investment in WTI crude oil futures traded on the NYMEX. The fund is priced near the bottom of its 52-week range of $20.01-$27.95.
As far as energy companies go, it's probably wise to avoid those directly involved in the Gulf disaster. That would be British Petroleum, or BP (NYSE: BP), of course, plus Transocean Ltd. (NYSE: RIG), owner of the Deepwater Horizon rig; oilfield service provider Halliburton Co. (NYSE: HAL); Cameron International Corp. (NYSE: CAM), responsible for the faulty blowout preventer; and Anadarko Petroleum Corp. (NYSE: APC), part-owner of the well.
Although these companies lost more than $100 billion in market capitalization since the April 28 explosion - and are probably undervalued as a result - their future liabilities with respect to clean-up costs and damages won't be clear for months or even years to come. All will also face future operational restrictions as a result of the ongoing investigations and resulting regulatory changes. (If you insist on taking a contrarian stance among this group, Anadarko probably has the least exposure to the spill and the largest array of alternate resources, making it a decent buy at the recent price of around $39.15 a share.)
The potential restrictions could also pose a risk, or at least a price restraint, for many of the other major oil companies, such as Exxon-Mobil Corp. (NYSE: XOM) and ConocoPhillips (NYSE: COP).
Similarly, President Obama's new six-month moratorium on additional offshore drilling will weigh heavily on the oil services sector, which has taken a drubbing the past month on weakness in firms like Baker Hughes Inc. (NYSE: BHI) and Schlumberger Ltd. (NYSE: SLB). As evidence of this weakness, the Philadelphia Oil Service Sector index (^OSX) is down 28.3% since its April 23 top.
Given these factors, the best way to play an oil rebound through direct stock investment would be through smaller U.S. companies with little or no offshore activity.
Two possible choices are:
Goodrich Petroleum Corp. (NYSE GDP), recent price $14.16 - Based in Houston, Goodrich's activities are focused in east Texas, northwest Louisiana and four other states, where it owns a working interest in 466 active oil and gas wells with proven reserves of nearly 1 million barrels of oil and 415 billion cubic feet of natural gas. Insiders obviously have faith in this company as they've snapped up more than $1 million worth of shares in the last month, taking advantage of the drop in prices since the late April high of $19.19.
Plains Exploration & Production (NYSE: PXP), recent price, $23.59 - Although Plains does have some offshore interests - including a new exploration project off Vietnam - the bulk of its 359 million barrels of oil and oil-equivalent reserves is in California, the Gulf Coast region, the Mid-Continent Region and the Rocky Mountains. The Houston-based company had trailing 12-month earnings of $1.42 a share and the recent price is near the bottom of the 52-week range of $19.28 to $36.60.
Another interesting sector play combines oil with one of the growing alternative-energy sources - wind.
Kaydon Corp. (NYSE: KDN), recent price, $36.97, is a world leader in the design and manufacture of custom-engineered, critical-performance products such as bearings, shaft seals, retaining rings, fuel-cleansing systems and metal alloy products. Their services should be in high demand as drillers update equipment and rigs to meet new safety standards. (The age of the Deepwater Horizon rig has already been cited as one of the faults leading to its catastrophic failure.)
Kaydon's systems give you some diversification, too, since they're also used in fields from aerospace and defense to autos and even medical systems. Plus, their bearings and seals are used extensively in windmill energy generators, accounting for 10% of the company's current revenues - with that number expected to triple in the next three years. The company has earnings of $1.48 per share, pays a dividend of 72 cents and the stock is in the lower third of its 52-week range of $29.16 to $45.69.