Yahoo Finance The Best Energy Stocks to Buy for 2016
Are you looking for a bargain? Many energy stocks were pummeled this year as plunging crude oil prices ate up profit margins across the sector. Crude oil prices have tumbled to near $40 per barrel, down from $98 a year ago, pressured by a global oil glut and weak demand.
The supply/demand balance may finally be nearing a tipping point, and better crude oil prices could lie ahead, bullish analysts say. "The worst is over. Throughout 2016, we should see increasing demand soak up the oversupply," says Andy Lipow, president of Lipow Associates, a Houston-based energy consulting firm.
The outlook for higher oil prices is creeping into more and more 2016 forecasts. Barclays expects the price of crude oil to rise next year. Forecasts for West Texas Intermediate crude oil futures are pegged at $48 per barrel in the first quarter, $57 per barrel in the second quarter, $64 per barrel in the third quarter and $66 per barrel in the fourth quarter.
"We are constructive on the energy sector for 2016," says Joshua Kohn, portfolio manager at CenterSquare Investment Management near Philadelphia. "We believe the stocks have overcorrected to the downside and are reflecting a long-term $40 world that we do not see as realistic. Globally, even with a deceleration in China, demand is strong and expected to grow next year. The combination of an increase in global demand and a decline in North American supply will create a rebound in oil prices in mid-2016."
Even now, the supply/demand dynamics are finally starting to even out. U.S. oil production has come down in 2015 as energy drillers pulled back amid the tumbling price of crude oil. "After a 540 million-barrel surge in global petroleum stocks in recent quarters, the oil market looks more balanced in fourth quarter [of] 2015," according to a Bank of America Merrill Lynch Global Research report.
Into 2016, the supply/demand balance looks even better. "In the U.S. alone, projected U.S. crude oil production is expected to decline by 500,000 barrels per day to average 8.8 million barrels per day in 2016," says Mike Ciccarelli, stock and commodities trader at Chicago-based Briefing.com.
It's hasn't been pretty for energy stocks this year. But now might be the time to start sifting through the carnage to add energy positions to your portfolio. Oil and gas drilling stocks are down 29 percent, oil and gas exploration and production stocks are down 24.4 percent and oil and gas storage and transportation stocks are down 35.4 percent, according to S&P Capital IQ data.
There are plenty of choices for bargain-hunting investors looking for stocks in the energy space. "Valuations have gotten cheap enough to be interesting in the face of low oil prices -- at this level, the chances of having a positive outcome after 12 months are pretty good," says Jason Pride, director of investment strategy at Philadelphia-based Glenmede.
Still, it pays to be selective. Investors need to do their homework and be choosy. "There are some oil and gas stocks that are still in such bad shape. It's important to buy names that not only have solid production prospects but also a strong balance sheet. We can't be bullish on the whole energy space since there are some that are likely to still go bankrupt," Ciccarelli says.
"If you're going to play the space, you need to tilt toward the higher-quality players. We have a preference toward the majors right now because they have staying power," Pride says.
Here are seven energy stock picks for 2016:
ExxonMobil Corp. (XOM). ExxonMobil is one of the world's largest energy companies involved in the exploration and production of crude oil and natural gas. "If you are going to own an energy stock, this is it. The world runs on fossil fuel, and there currently is no viable economic alternative," says Kelley Wright, managing editor of the Carlsbad, California-based Investment Quality Trends newsletter. Exxon is also attractive because of its history of increasing dividends and its low long-term debt.
Philips 66 (PSX). Philips develops and acquires crude oil, refined petroleum products and natural gas liquids, pipelines and other transportation and midstream energy assets. Its assets include crude oil and refined petroleum-product pipeline, terminal and storage systems in the central and Gulf Coast regions of the U.S. "Annual earnings per share growth for the past five years is over 60 percent, and forecast growth for the upcoming year is in the 20 percent range," says Dan Neiman, partner and portfolio manager at San Diego-based Neiman Funds Management.
Valero Energy Corp. (VLO). Valero is an international refining and marketing company. While weak crude oil prices have weighed on producers, companies in the refining sector have benefited from lower input costs. "Valero is one of the best performers in this area in 2015. Valero has invested a ton into its system to increase both the access to and the processing capabilities of crude oil. With margins already at all-time highs, this recent investment could make margins even higher. This stock is a still a buy," Neiman says.
Continental Resources (CLR). Continental Resources is an independent U.S. oil and gas producer. "Continental is our top pick within the U.S. oil-focused exploration and production group. Continental played a key role in the early development of the Bakken Shale and now holds 1.2 million net acres prospective in this prolific oil play," says David Meats, equity analyst at Chicago-based Morningstar. The firm rates Continental Resources with five stars, its highest rating.
EOG Resources (EOG). EOG Resources is an exploration and production oil and gas company. "EOG sticks out as one of my favorite names to own on an oil market recovery," Ciccarelli says. He says the company has solid production growth prospects; exposure to top plays including the Eagle Ford, Bakken and Delaware Basin; low financial leverage; low-cost operations; and a solid balance sheet.
Pioneer Resources (PXD). Pioneer Resources is a Texas-based oil company, formed by the merger of Parker & Parsley Petroleum Co. and MESA in 1997. It has a market capitalization of about $22 billion, and the stock is relatively flat for the year despite steep stock losses in the sector. Ciccarelli says the company has attractive production prospects with core assets in Midland Basin and Eagle Ford, a strong balance sheet and improved efficiency, as company expects to deliver forecast growth using fewer rigs in the Spraberry/Wolfcamp oil field. "PXD also sticks out as one of my favorite names to own on an oil market recovery," he says.
QEP Resources (QEP). QEP Resources is a Colorado-based energy company working in exploration and development of oil, natural gas and dry gas resources in North Dakota, Colorado, Utah, Wyoming, Texas and Louisiana. "They are more efficient today than ever before, and this is key. The company delivered strong oil production growth in the quarter, up 6 percent sequentially from the second quarter 2015, driven by better-completed well performance in the Williston and Permian basins," Ciccarelli says.
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