Oil and natural gas prices typically fluctuate due to forces like geopolitical events, oil discoveries, new production technologies and, of course, good old-fashioned supply and demand.
When looking for the best oil stocks to buy, you’ve got to take all of these factors — and more — into consideration.
In fact, by looking for the right oil stocks for you, you’ve likely already determined that you’re lacking an adequate exposure to energy in your portfolio. If you haven’t, go back and take a look at your holdings before buying oil stocks willy-nilly.
Still sure you want to be an energy investor? Good. This is how you can find the cheapest, best oil and gas stocks to invest in, regardless of the market.
[See: The Best Energy Stocks to Buy for 2017.]
Decide where you stand on oil prices. What is the price of a barrel of oil and where are oil prices heading from here? This is probably the most fundamental question you need to answer, and it depends on a potpourri of factors.
Since commodity levels are determined by global supply and demand, those two forces are the biggest factors to consider. For example, the precipitous fall in oil prices that began in 2014 was the result of a massive supply glut, caused partly by American energy companies dramatically increasing production, something enabled by shale drilling and new fracking technology.
Other factors, such as the economic climate, OPEC production decisions, the strength of the dollar and oil’s overall price trend all also contribute to how much a barrel of oil costs.
Invest accordingly. Obviously, most names that are traditionally considered oil stocks will benefit when the price of oil is rising. In particular, “upstream” companies — companies that drill for and produce oil and natural gas — have a much greater incentive to drill and ability to profit at higher prices.
However, there are still energy stocks that can soar in bearish commodities markets. Refiners, for example, earn a much higher profit margin when oil prices are low. They often market the refined product as well — selling the refined gasoline you buy at the pump, making their money on the difference between gas prices at the pump and what it costs to acquire and refine that product.
Buy drillers if you think crude prices will rise, and refiners if you think they’ll fall.
Stocks or exchange traded funds? Now that you know the type of company you’d like to invest in, decide how concentrated you’d like that investment to be. If you’ve done your research and are convinced you’ve found a few cheap energy stocks you like, you might simply want to buy into one or two different companies.
On the other hand, if you’re not in love with one company or another, but simply have a thesis about where crude prices are going, you might look to buy an exchange traded fund that trades like a stock but provides exposure to a basket of names in one industry.
[See: Oil ETFs: 8 Ways to Invest in Black Gold.]
There are also leveraged ETFs, which can be an option for shorter-term traders with a strong feeling about the near-term direction of the market.
Long or short term? Beware though, due to some esoteric facts about how they’re constructed, leveraged ETFs are essentially guaranteed to lose money over long periods of time, even if the underlying trend you’re betting on ends up playing out. Use them only for short-term wagers.
They also don’t pay dividends, a bonus many energy stocks offer that long-term investors shouldn’t overlook, since they can really add up over time. In fact, if you buy shares with a substantial, sustainable dividend and you decide to reinvest it, you can tell your broker to put it towards buying more shares each period, building your position instead of padding your wallet with cash.
These plans are known as dividend reinvestment plans, or DRIPs, and are perfect for long-term investors in strong dividend stocks (without a need for an immediate income stream).
Examine the fundamentals. So you’ve decided what type of investment works for you. Now you need to go out, do a little homework and find the best stock for you.
Some questions you’ll want to ask yourself are:
— What does the balance sheet look like? How much debt is the company in and is it manageable?
— Do analysts expect revenue growth?
— What kind of assets does the company have? Are they long-lived? For producers, is the company constantly making new discoveries? Or are there rapidly depleting reserves?
For funds, you’ll want to look at the top holdings, its price-earnings ratio, dividend yield, how it’s constructed, and the expense ratio.
Some of the usual suspects. The first five points are general rules of thumb that you’ll want to think about in your search for the best oil stocks to buy today — no matter what day today is.
As you start answering more and more of the above questions, you’ll be able to narrow down your investing options to a smaller and smaller universe, but to save you some time, here are a few big stocks and funds that might save you some time to look at first.
Major integrated oil and gas stocks. Exxon Mobil Corp. ( XOM) and Chevron Corp. ( CVX) are mega-cap stocks worth hundreds of billions of dollars; their vast assets, reserves, and global tentacles essentially ensure they’ll be around forever. Not only do they offer a level of stability you can’t find elsewhere in the sector, they pay sizable dividends. Broadly speaking, both are great long-term portfolio pillars.
Oilfield services. Schlumberger Limited ( SLB) and Halliburton Co. ( HAL) are good picks here. These companies provide the equipment, technology and analytics services that keep production humming. Share prices tend to be positively correlated with rising crude prices.
Refiners. There are more than a few names to choose from, but Valero Energy Corp. ( VLO) and Tesoro Corp. ( TSO) are each established refiners that pay dividends and have shown a tendency to rise as oil falls.
Diversified ETFs. Two prominent energy ETFs with broad exposure and low expense ratios (an important factor to consider in ETF investing) are the Energy Select Sector SPDR ETF ( XLE) and the Vanguard Energy ETF ( VDE). More industry-specific ETFs like SPDR S&P Oil & Gas Explore & Production ETF ( XOP) are also available.
[See: 7 of the Best ETFs to Own in 2017.]
Leveraged ETFs. Proshares Ultra Bloomberg Crude Oil ( UCO) seeks to return two times the daily performance of oil futures, while ProShares UltraShort Bloomberg Crude Oil ( SCO) seeks to do the opposite, returning the inverse of crude oil futures’ daily performance. Remember to always use tools like these carefully, and never invest if you’re buying and holding for the long term.
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How to Find the Best Oil Stocks to Buy Now originally appeared on usnews.com
