The American gold rush is back, but this time prospectors are digging for “black gold.” Of course the quest for oil never really went away, but interest in domestic production does seem to be rising. According to the Department of Energy, the U.S. is expected to produce more crude oil than it imports in 2013 — the first time that’s happened since 1995. Meanwhile, the International Energy Agency projects the U.S. to outproduce Saudi Arabia’s production by 2020.
For investors who want to get in on the stampede, oil and gas stocks are one way to gain exposure. Oil production is a complex process that requires coordinated efforts down a long chain of businesses. From exploration, to extraction, to refining, there is no shortage of opportunities to consider. In this post, we’ll check out some companies involved in oil production that also look solidfundamentally.
National-Oilwell Varco, Inc. (NYSE:NOV) is a $30 billion company based in Texas. It designs, manufactures, and distributes equipment used in oil and gas drilling worldwide. The company is considered to be vital to the oil and gas equipment / services industry. According to National-Oilwell Varco, Inc. (NYSE:NOV), more than 90% of mobile offshore rigs, and more than 50% of large-sized land-based rigs use its parts and components. This kind of market dominance makes National-Oilwell Varco, Inc. (NYSE:NOV) a leader in its business. Meanwhile, it has impressive financials to match. Relative to its industry and market averages, National-Oilwell Varco, Inc. (NYSE:NOV) looks good in terms of financial condition, growth, and valuation. The only thing to gripe about is its stock price, which is down about 14% over the past year.
Helmerich & Payne, Inc. (NYSE:HP) is a $5 billion dollar company based in Oklahoma. It provides contract drilling services for oil and gas wells worldwide. Helmerich’s long history of R&D has made it an industry leader. Its proprietary line of “FlexRigs” are some of the most advanced on the market. Simply stated, FlexRigs can drill where others cannot. That makes them more nimble and cost efficient versus competitors. Operators have taken note and increased demand, which has caused a shortage of high-end rigs. According to Helmerich, this has allowed the company to fill its order book and sign long term contracts at premium rates. By the numbers, Helmerich looks strong financially and has a relatively attractive valuation. Earnings growth, however, has been lackluster, which looks to be an issue with its industry in general. Helmerich stock price is up about 10% over the past year.
Tesoro Corporation (NYSE:TSO) is an $8 billion dollar company based in Texas. It is one of the largest independent oil refining and marketing companies in the US. Tesoro is a leading refiner in the western states and has facilities in Washington, California, and Utah. Concentrating its presence in the west has helped Tesoro lower costs, increase efficiency, and build a stronghold in California where it currently commands 25% of the state’s refining capacity. That’s important because California is a huge market that offers higher margins due to the need for special petroleum blends. Financially, I think Tesoro seems the least attractive among the companies mentioned so far–particularly in terms of debt, liquidity, and RoA. That being said, Tesoro still looks superior relative to its peers across a wide range of measures. This has been reflected in its stock price, which is up by more than 100% over the past year. That kind of a rally could certainly be indicative of a short-term pull back in price.
As with most oil and gas investments, these stocks are cyclical, sensitive to economic conditions, and can be quite volatile. Combined with the usual risks and challenges associated with stock picking (including the high likelihood of just being plain wrong), making good picks takes time and effort. If the extra work that comes with individual security selection doesn’t sound appealing (or sensible), then funds like ETFs may be a good option.
For example, the Energy Select Sector SPDR is one of the most popular energy ETFs. It seeks to track the broad energy sector and holds 45 companies spread across the oil, consumable fuels, and energy equipment / services industries. The largest holdings include Exxon and Chevron. Another choice is the iShares Dow Jones US Oil Equipment & Services Index ETF. It provides more targeted exposure and holds 48 companies all focused on the oil equipment & services industry. The largest holdings include Schlumberger and Halliburton.
Regardless of the means, prudent investors should take positions in moderation as part of properly diversified portfolios appropriate for their needs, and of course, only at their own risk.
The article The “Black Gold” Rush originally appeared on Fool.com.
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