And when this market accelerates as it did in early 2008, prices can easily jump 50% in a few months. Take a look at the big move below.
This is a chart of West Texas Intermediate (WTI) crude oil prices. Crude oil just logged its best five-day run in eight months, trading near the key $100 level.
That bullish movement has been driven by big institutional investors sending capital into commodities, with hedge and fund managers increasing their net long positions across a basket of 18 U.S. futures and options markets by 10% in the week ended March 26. That mirrors a larger trend, with bets on commodities up 67% in the past three weeks, the biggest gain since May 2009. And one of the biggest destinations of those bets is into crude.
That’s because peak consumption in the spring and summer is right around the corner, and the smart money is betting prices will move higher. With monetary stimulation from the central banks of the world fueling potential inflation, the stage is set for crude to make another run to its all-time high above $147 per barrel this summer.
Buying a crude-oil exchange-traded fund (ETF) such as PowerShares DB Oil Fund (NYSEARCA:DBO) is a good way to profit from rising oil prices, as demonstrated in the chart above. But there’s a better way: Buyshares in exploration and production (E&P) companies that own and extract the commodity from the ground. [These are the special kinds of stocks and opportunities that my colleague Nathan Slaughter looks for in his Junior Resource Advisor newsletter.]
Exploration companies provide unparalleled leverage to crude prices, reaping huge gains in sales andearnings when prices surge higher.
But the group has been under pressure in the past two years after energy stocks collapsed in the spring of 2011. That has E&P stocks trading at record low valuations and carrying big-time dividend yields.
Here are seven E&P stocks with yields up to 9%.
From this group, I like BreitBurn Energy Partners L.P. (NASDAQ:BBEP) because of its outsized dividend yield, and Atlas Resource Partners, L.P. (NYSE:ARP) because of its earnings power.
Breitburn Energy Partners
Breitburn explores and produces oil in Texas, California, Wyoming, Indiana and Kentucky. The company also explores for natural gas, providing additional leverage to another growing segment of the global energy market.
Despite the S&P 500’s big gains in the past two years, Breitburn’s shares are down 7% during the same period. No doubt that has a lot to do with crude trading mostly sideways and natural gas falling sharply. But with both markets on the mend, higher crude and gas prices would be a boon to the company.
Analysts are looking for earnings per share (EPS) of 86 cents in 2013 and 96 cents in 2014. That has shares trading with a forward price-to-earnings (P/E) ratio of 23, a slight premium to its peer average of 19. But when you add in the dividend yield of 9.4%, Breitburn offers strong growth and income.
