After a 3-year bear market, rig counts – both U.S. and International – have bottomed and activity is starting to bounce off slowly. Both oil and natural gas have rebounded from their multi-year lows reached in 2016, and while the commodities may not be at levels many thought they would be at the end of the year, even at today’s prices certain companies are in a position to earn profits.
Throughout the downturn, energy firms worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service producers.
True, the energy market faces many uncertainties and it may not be time to buy stocks indiscriminately, but there are players that look like pretty compelling investments.
Permian Basin's Oil Boom Can Make You Rich
One oil-producing region that continues to attract investors is the low-cost Permian Basin - spread over west Texas and New Mexico. According to some estimates, the region – that has been churning out crude continuously for nearly 100 years – has produced in excess of 30 billion barrels of oil since output began in 1921.
Experts say that it’s cheaper to drill and complete oil wells in the Permian Basin than most other major fields. Moreover, there are certain parts of the shale play whose well-returns are the best in the U.S. With crude prices still down significantly from their 2014 levels, well returns have become a very important metric to gauge profitability.
Permian’s attractive economics means that producers can still make money there at the current, just over-$50-a-barrel price. This is mainly because of the region's extensive pipeline infrastructure, plentiful labor and supplies, and relatively warm winters that makes year-round work possible. Most other domestic shale regions need prices above $60 to support new developments and expansions.
As a result, the Permian currently constitutes a lion’s share of the industry's recovery. In 2016, more than a third of the total amount spent on all U.S. deals was spent on Permian land purchases and leases. No other major oil region in the country came close to this activity.
With the hectic pace of land grab set to continue in the Permian basin and investor’s strong appetite for stocks focused in that region, we have shortlisted 3 companies that might fetch you outstanding returns.
Apart from Zacks Rank #1 (Strong Buy) Pioneer Natural Resources Co. (PXD - Free Report) , we advocate the likes of RSP Permian Inc. RSPP and Concho Resources Inc. (CXO - Free Report) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MLPs to Cash in on Trump's Pipeline Push
Units of energy infrastructure master limited partnerships (or MLPs) have seen renewed interest from investors after President Trump took steps to fast-track two controversial oil pipeline projects.
In his short time as President, Donald Trump is being credited with the revival of the U.S. MLP sector that was reeling under the twin forces of a prolonged oil price slump and bitter opposition from environmental activists.
Making good on his campaign promises to rev up infrastructure spending, President Trump signed executive orders to smooth the way for TransCanada Corp.’s (TRP - Free Report) Keystone XL Pipeline and Energy Transfer Partners L.P.’s ETP Dakota Access Pipeline just a few days into his new Administration.
With the U.S. government indicating that it will expedite approvals of future developments as part of new energy infrastructure projects, the benchmark Alerian MLP Index (AMLP - Free Report) is currently up more than 60% from its Feb 2016 lows.
Moreover, given the current volatility in petroleum stocks, MLPs are probably the best method of investing in the sector. They also offer liquidity and tax benefits, which add to their appeal. This is why these stocks would make good additions to your portfolio.
With capital market access remaining tough for most sector components, we suggest buying stocks with clean balance sheets. Our picks would include the likes of Energy Transfer Equity L.P. ETE, CONE Midstream Partners L.P. CNNX and TC PipeLines L.P. (TCP - Free Report) .
Look at Integrated Majors for Their Solid Financial Shape
In this current turbulent market environment, we advocate the relatively low-risk energy conglomerate business structures of the large-cap integrateds, with their fortress-like balance sheets, ample free cash flows even in a low oil price environment and steady dividends. These companies continue to benefit from their scale and diversification that result in the strongest returns on capital in the industry.
Thanks to their integrated structures, entities like Royal Dutch Shell plc (RDS.A - Free Report) , Chevron Corp. (CVX - Free Report) and Repsol SA (REPYY - Free Report) have been able to withstand plunging oil prices better than the rest and protect their top and bottom lines to a certain extent.
The companies’ financial flexibility and strong balance sheet provide them with a larger war chest to draw upon in this highly-uncertain period for the economy. Most of them remain in excellent financial health, with ample cash on hand and investment-grade credit ratings with a manageable debt-to-capitalization ratio. On top of this, managements have established quite a track record of conservative capital management and cash returns to shareholders. They also pay a safe dividend, yielding attractive returns.
While all of them have suffered from the crude carnage over the past fes years, holding on to them can still prove to be an astute move. Moreover, large integrated companies – unlike their small or medium-sized producers – are not known to hedge a major share of their future production. So, they are more likely to benefit from any event-driven higher spot prices – like the OPEC agreement.
Check out our latest Oil & Gas Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?
Who wouldn't? Last year's market-beating Top 10 portfolio produced 5 double-digit winners. For example, oil and natural gas giant Pioneer Natural Resources and First Republic Bank racked up stellar gains of +44.9% and +44.3% respectively. Now a brand-new list for 2017 has been hand-picked from 4,400 companies covered by the Zacks Rank. See the 2017 Top 10 right now>>