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How
to Buy Oil Stocks
Oil prices
are flirting with all time highs, and oil company stocks, which
generally move with oil prices, have outperformed the market this year.
Nevertheless,
in my view, investors should still consider buying oil stocks. Here’s
why.
Oil demand
and oil production are reasonably in balance, and if all goes well, that
condition will persist over the next year or so. Production will
increase, but so will demand, powered by the global economic recovery
and by China’s swelling consumption.
But all
may not go well. Any event that threatens the flow of oil in the
Middle East, or anywhere else for that matter; will send oil prices up
and most of the stock market down.
Even without
supply disruption, many experts predict that global oil production
will peak in three years or so, and head down from there. But nobody
is predicting a similar drop in demand. You connect the dots.
Holding oil
stocks will help buffer your losses in the event of a near-term supply
interruption, and would be a good long-term investment even if that
doesn’t happen.
I’ll show
you how to find oil stock candidates worth researching, but with a
twist. We’ll look for stocks paying decent dividends. That way,
you’ll be collecting the dividend while you’re waiting for oil
prices to increase, and the dividend yield will help mute share price
swings during the inevitable down cycles.
Get Up To
Speed On Oil
Before picking individual stocks, you need to get up to speed on the
industry. So, we’ll start by finding out who the major players are
using Yahoo’s Industry Center, and then we’ll check an industry
trade journal to get a feel for current events. Finally, we’ll run a
screen to pick specific candidates.
Get to
Yahoo’s Industry Center by selecting Industries
on the main Yahoo Finance page (finance.yahoo.com),
and then select “Complete
Industry List” to see list of economic sectors and the industries
comprising each sector.
You’ll see
that the energy sector includes the coal, oil & gas integrated, oil
& gas operations, and the oil well services & equipment
industries. We’ll ignore coal and concentrate on the three oil-related
industries.
The
integrated oil & gas industry includes firms that participate in all
facets of the industry from exploration and production to refining and
marketing.
For reasons
I’ll explain in a minute, we’re only interested in the biggest
players, say the top 10, which you can see by selecting the Industry
Browser report and clicking on “Market Cap” twice to sort the
list by size with the largest companies at the top. Market-caps (number
of shares out multiplied by share price) of the top 10 ranged from Exxon
Mobil’s $280 billion down to $50 billion for ConocoPhillips.
Yahoo lists a
variety of fundamental data including dividend yields for each company.
Surprisingly, most of the bigger firms pay significant dividends, many
equating to dividend yields (annual dividend divided by share price) in
the 3 percent range.
The Oil &
Gas Operations industry includes smaller companies, mostly involved in
oil exploration and production, but not marketing. The largest company
in this industry is Canadian-based EnCana with a $19 billion market cap.
Again, most of large players pay significant dividends, in many cases
equating to more than 2 percent yields.
Yahoo’s Oil
Well Services & Equipment industry includes oil field mapping firms,
well drillers, pipeline builders, and other service providers.
Schlumberger, with a $34 billion market cap, is the biggest player.
You’ll see that many in this industry also pay significant dividends.
Get the
Industry Buzz
Next, go to Oil and Gas Journal Online (ogj.pennnet.com)
to get up to speed on industry scuttlebutt. It’s a subscription
magazine, but you’ll find plenty of worthwhile free information.
Screen For
Oil Stocks
Finally, we’ll use Reuter’s PowerScreener to find a list of oil
stock candidates. Use of the screener is free, but registration is
required. Find the screener from Reuters home page (investor.reuters.com)
by selecting Ideas
& Screening and then PowerScreener.
Reuters’ screener looks intimidating at first, but it’s easy to use
once you get the hang of it. The best way to learn how is to click on
Help after selecting the PowerScreener.
I built a
simple screen by first requiring passing stocks to be members of one of
the three industries of interest: integrated oil and gas, oil and gas
production, and oil well services and equipment. You do that by
selecting the Industry Description parameter in the Descriptive section,
and checking those industries.
As I alluded
to earlier, we want big, financially solid companies so that industry
fundamentals instead of company-specific factors influence share prices.
Standard
& Poors uses that same yardstick when it picks stocks for its
S&P 500 index. So I required S&P 500 membership by selecting the
S&P 500 indicator, also found in the Descriptive section.
To reduce
risk, I required analyst recommendations of “hold” or better, which
rules out stocks that analysts are advising selling.
Reuters
compiles analyst recommendations by assigning each rating a numeric
value from 1 to 5, where 1 is “strong buy”, 3 is “hold,” and 5
is “strong sell.” Thus, an average or consensus rating between 1 and
3 corresponds to “hold” or better. I set up that requirement by
specifying a maximum value of 3 for the Average Recommendation
parameter, found in the Earnings Estimates section.
Finally, I
required a minimum 2 percent dividend yield using the parameter found in
the Dividend Information section.
My screen
turned up seven stocks, including three integrated oil & gas firms,
ChevronTexaco, ConocoPhillips, and Exxon Mobil, and four representing
the oil & gas operations industry, Kerr-McGee, Marathon Oil,
Occidental Petroleum and Unocal. Eliminating the dividend requirement
would have increased the total to 22 candidates.
The stocks
turned up by the screen are research candidates, not a buy list. You
still have to do your due diligence.
published 5/30/04 |
