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Even as the sentiment toward the energy sector had turned sour of late on account of concerns over record U.S. shale output, the mutual fund industry seems to lap up leading stocks in the segment. In particular, BlackRock Inc. (BLK - Free Report) – the world’s largest asset manager – recently announced that its $39-billion BlackRock Global Allocation Fund boosted its exposure to “select names” in energy.

While the Zacks Oil-Energy sector has lagged the S&P 500 index in the year-to-date period (the sector has lost 14.9% of its value versus the 8.6% growth of the broader index), Russ Koesterich, one of the portfolio managers of BlackRock’s biggest mutual fund, believes that the underperformance of energy stocks creates investing opportunities.

With oil prices relatively stable and trading in a fairly narrow band, Koesterich said the fund’s managers have identified companies in the midstream, refining, exploration and production space in the U.S., apart from an European integrated major. However, he did not name any stocks.

Is BlackRock Right in Betting on Energy?

Oil has rebounded from its multi-year lows reached in 2016 and while the commodity may not be at a level many thought it would be at this time of the year, even at today’s prices certain companies are in a position to earn profits. And while we cannot run down the chances of the market moving sideways and seeing high volatility, many analysts are not too bearish about oil in the remainder of 2017. Here’s why:

Sharp Inventory Drawdowns: Investors have pinned hopes of recovery over the recent U.S. Energy Department's inventory releases that show multiple weeks of strong inventory draws in the domestic crude stockpiles – pointing to a slowdown in shale output. The nation's oil stockpiles have shrunk in 17 of the last 19 weeks and are down more than 60 million barrels since March.

The Shift into "Backwardation": Recently, the front-month Brent contract have shifted into "backwardation" – a phenomenon when near-term oil futures trade at a premium to futures dated further out. Analysts consider this as a bullish signal with the so-called backwardated market helping flush out inventories by eliminating the incentive to put oil in storage.

Fall in Rig Count: According to Baker Hughes, the GE-owned company’s closely watched weekly report, the oil rig count has gone down for a second week in three. This implies that U.S. energy firms are cutting down on their capital investment plans in reaction to low crude prices. Importantly, this is an indicator of lower future production.

OPEC Curbs Are Working: As per PetroLogistics – an organization tracking the cartel’s shipments – OPEC oil production is set to fall by a massive 419,000 barrels per day in August. This points to the success of the 14-member group’s output curb initiatives and rising compliance levels.

Oil Demand Estimates Upped: Energy bodies OPEC and IEA both recently raised global oil demand forecasts for this year, helping to tighten the market significantly.

Follow BlackRock and Jump into the Energy Bandwagon

With the BlackRock Global Allocation Fund’s lowest-cost shares returning around +10% this year – ahead of most of its competitors – following on the footsteps of the investment giant can be a great move.

But with a wide range of energy firms thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver attractive returns. While it is impossible to be sure about such outperformers, this is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

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In particular, we have shortlisted 5 companies from the BlackRock-preferred energy sectors that have a Zacks Rank of #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our Choices

Range Resources Corporation (RRC - Free Report) : Headquartered in Fort Worth, TX, Zacks #1 Ranked Range Resources is an independent oil and gas company, engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the U.S.

TransCanada Corporation (TRP - Free Report) : TransCanada, with a Zacks Rank of 1, is a major North American energy infrastructure company with operations located in Canada, U.S., and Mexico.

Lonestar Resources US Inc. (LONE - Free Report) : Headquartered in Fort Worth, TX, Lonestar is a Zacks Rank #1 oil and gas exploration and production company with primary focus on the Eagle Ford Shale in South Texas.

TransMontaigne Partners L.P. (TLP - Free Report) : #1 Ranked TransMontaigne Partners is a publicly traded limited partnership that provides petroleum products terminalling and transportation services across the U.S.   

Par Pacific Holdings Inc. (PARR - Free Report) : Par Pacific Holdings, based in Houston, TX, is a Zacks Rank #2 diversified energy player that operates in 4 segments: Refining and Distribution, Retail, Commodity Marketing and Logistics, and Natural Gas and Oil.

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