Energy Potential

May 28th, 2015
in contributors

Investing Daily Article of the Week

by Ben Shepherd, Investing Daily

Despite high hopes for better than 3% growth this year, the U.S. economy has gotten off to a slow start. GDP bumped up a barely perceptible 0.2% in the first quarter, but most economists believe that will be revised downward by as much as -1% when the final reading is in. At any rate, odds are that the economy contracted in the first quarter.

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There are a lot of reasons for that, not the least of which was terrible winter weather and a West Coast port strike that ground exports to a virtual halt. The main culprit, though, was plunging oil prices. While it was believed that the lower gasoline prices which inevitably follow an oil drop would spur consumer spending, the one didn't exactly follow the other.

In the first three months of the year, Americans bumped their spending by just 1.9%, the weakest gain in a year. In the meantime, spending by oil and gas companies on everything from drilling rigs to pipes was cut by nearly half. The weak increase in consumer spending wasn't enough to offset the drop in energy company spending as consumers clearly weren't convinced that lower gasoline prices were here to stay.

Those trends are widely expected to reverse in the coming months; the strong dollar which has made exports more expensive is leveling off, consumer spending picks up as gasoline prices are still a full dollar lower than last year in most parts of the country and energy company spending is stabilizing.

U.S. crude inventories are finally being drawn down, with government data showing stockpile declines for the past two weeks. While analysts had predicted an increase of 386,000 barrels last week, government data shows oil inventories actually declined by 2.2 million barrels. While much of that drawdown has to do with a pickup in refining ahead of peak driving season, U.S. production has also dropped sharply based on deliveries to key storage hubs.

Given the improving supply outlook, oil prices have actually risen by more than $10 over the past month, though they are still fairly volatile.

A glut of new oil supply hitting the market from Iran following a possible nuclear accord, one of the main fears in the oil market, also appears less likely. The U.S. Congress has passed a bill giving itself the change to review any agreement reached with Iran, which also requires that current sanctions are maintained while that review takes place. Given Iran's recent mischief in the Strait of Hormuz, a key Middle Eastern sea chokepoint, Congress will view any deal with a pretty skeptical eye.

With oil prices stabilizing if not quite yet rallying, this could be a good time to add some energy stocks to your portfolio.

Cheap Oil Takeover Target

One that our analysts over at the Energy Strategist favor is BP.

You're probably well aware of the supermajor's legal troubles over a couple of accidents in the past decade. In 2005 there was a refinery explosion in Texas City which killed 15 people and injured 170, then five years later there was the Deepwater Horizon spill in the Gulf of Mexico. The Texas City disaster cost BP (NYSE: BP) well over a billion dollars and it's facing as much as $55 billion in costs and fines over the spill.

Between that unsettled liability and the risk that oil prices could tank again, BP is one of the most undervalued super-oils around. In the estimation of our analysts, that makes it a likely takeover target, though the precise timely of a deal remains to be seen.

The Energy Strategist has other energy angles covered as well and energy services and equipment firms are also likely to be a quick beneficiary of a healthier energy patch.

National Oilwell Varco (NYSE:NOV), a major provider of drilling and production equipment, has seen nearly a third of its market capitalization shaved off as a result of the decline in activity. The business has undeniably suffered recently, with revenue falling by 16% in the first quarter while its backlog of work fell by 17%.

Still, the company absolutely dominates the drilling market, with any company that drills for oil or gas likely using at least one of its products. As a result, most analysts predict that National Oilwell Varco should begin seeing a recovery later this year as the oil market stabilizes.

Having lost a third of its value over the past year and currently trading at just 9.8 times trailing earnings - a substantial discount to its own 14.1 five-year average and the 19.1 times the S&P 500 commands - this is a great opportunity to pick up shares on the cheap.

Another Way to Play

But there are more ways to play the oil and gas markets then the commodity price alone. For instance, there are two companies that can profit handsomely from a strategic pipeline recently approved by the U.S. Energy Commission, just click here for more information.

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