How to Play Plunging Crude Oil?
Oil prices have experienced a devastating sell-off since the beginning of May. The magnitude and intensity of the price move has been astounding, as crude oil punctured the $80 level to the downside on Thursday. During Friday's trading session, NYMEX crude retraced some of yesterday's losses, up roughly 2% to $79.66.
Given the trajectory of the sell-off and continued concerns over the state of the global economy and the European sovereign debt crisis, oil may continue to fall in the coming weeks. Wednesday's FOMC statement from the Federal Reserve could potentially also act as a downside catalyst. The central bank refrained from enacting another round of QE, while extending its bond buying program Operation Twist.
Overall, the market appears to have been slightly let down that the Fed is not going to be more aggressive in their monetary policy outlook in the near-term. This could be another headwind for crude oil. Nevertheless, in an article from late May, Benzinga noted that price support might not be found in crude oil until somewhere between $75.00 to $85.00. With oil at roughly $80.00, it could be time to get long, as sentiment seems to be reaching an extreme. Attempting to call a bottom in a market that has been so one-sided over the last month and a half, however, is risky.
Since its high on May 1 of roughly $106.50 to its recent low of $77.56, NYMEX crude prices have fallen more than 27%. In addition, the United States Oil Fund ETF (NYSE: USO) is down a little better than 25% over the last three months and more than 21% year-to-date. Instead of making an outright bet on the direction of crude prices, a more conservative approach may be to dip into some oil related equities which have also been hit hard.
The Energy Select Sector SPDR ETF (NYSE: XLE), for example, is down almost 12% over the last 3 months. The SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) has lost more than 20% during the same time period while the Market Vectors Oil Services ETF (NYSE: OIH) has lost more than 18% over the last 3 months. Considering that there is so much pessimism in oil equities, where might be some places to buy?
In the integrated oil space, both Conoco (NYSE: COP) and BP (NYSE: BP) are trading at low valuations with very attractive dividend yields. Conoco has a trailing P/E of 5.80 and a dividend yield of roughly 5% at current levels. BP is trading at a trailing P/E of 5.02 and is also yielding right around 5%.
Independent oil & gas names that could benefit from a shift in sentiment in the energy markets include industry leaders such as Apache (NYSE: APA) and Anadarko (NYSE: APC). Both stocks have been hit hard over the last 3 months, falling 19% and 21%, respectively. Apache is yielding around 0.80% and is trading at a trailing P/E of 7.67, a forward P/E of 6.32, and a PEG ratio of 0.91. Anadarko yields 0.60% and is trading at a forward P/E of 12.21. Both companies have market caps of around $30 billion and should benefit from a bounce back in oil prices and energy sentiment.
In oil drilling & exploration, a couple of small-cap names have been able to buck the trend in 2012 and are up considerably for the year. Cheniere Energy (AMEX:LNG), a natural-gas name, has risen more than 42%. Vantage Drilling (AMEX:VTG), another small-cap energy name, has surged 25% so far in 2012.
In the services sector, some of the highest quality stocks include Baker Hughes (NYSE: BHI), Halliburton (NYSE: HAL), Schlumberger (NYSE: SLB) and Transocean (NYSE: RIG). All of these stocks have traded down sharply over the last year and could be presenting an opportunity at current levels if risk appetite picks up in the energy complex. Investors also might find opportunities among the leading refining names including Hess (NYSE: HES), Marathon Petroleum (NYSE: MPC), Marathon Oil (NYSE: MRO), Tesoro (NYSE: TSO) and Valero (NYSE: VLO). Most of these stocks have bottomed out ahead of oil and are trading in new up-trends.
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