Stocks To Play Off The Oil Cutback

The stopgap deal to drive up oil prices arranged at last month's OPEC meeting came with a number of open-ended questions about the efficacy of the measure and just what the impact might be on energy stocks.

Pavel Molchanov, senior vice president and equity analyst at Raymond James, appeared on Thursday's episode of Benzinga's PreMarket Prep to talk about which oil and energy stocks are on his radar and why the big brands might not be the best bet to win on rising oil prices.

Climate Of Oil

OPEC-member nations were considering the cutback for quite a while prior to the actual meeting. According to Molchanov, much of the continued impetus for the decision came from increased production from nations outside of the coalition, like Russia, Brazil, Mexico and the United States.

This increased diversity in oil suppliers drove down prices, which in turn has limited the growth of the industry. Molchanov emphasized, "The industry really need oil at least at $60 to grow supply at a sustainable basis."

Those conditions illustrate why OPEC's move to decrease supply was necessarily so drastic, as Molchanov explained. "OPEC, together with Russia and a few other countries are promising to cut supplies by more than 1.5 million barrels a day; we really doubt they will fully deliver on all of that. There is a history of cheating, of course, but even if they deliver half of that amount, that is a very meaningful reduction in supply, about 1 percent of global supply taken offline."

Go Where It Flows

So, where should investors put their money as oil revenue begins to ramp up? In Molchanov's estimate, not where you expect. "Focus on companies with the most operating leverage to oil recovery and stay away from super defensive names. Exxon Mobil Corporation XOM, BP plc (ADR) BP, those stocks were good when oil was falling, because they trade. Now it’s the reverse; they are a source of funds."

Instead, Molchanov indicated "higher beta, more aggressive ideas in Exploration & Production" are areas to look toward when investing in oil. He specifically mentioned Marathon Oil Corporation MRO and Kosmos Energy Ltd KOS, as well as derivative moves in pipeline and drilling companies.

Get Clean

Before wrapping up, Molchanov also surveyed some renewable and clean energy stocks to consider. Although, he was quick to clarify, "I always point out that solar and wind are electricity sources, which doesn’t compete with oil."

However, ethanol does have a positive correlation with oil price. Molchanov recommended Green Plains Partners LP GPP as a safe entry play into the market. "They are attached to a parent company that produces ethanol. GPP handles the storage and shipping, and they don't care about the price of the commodity, which has been going up with oil. But even if it goes down it’s not a big deal, all they care about is the volume. More gas demand, more cars on the road, more ethanol usage."

Listen to the full discussion in the clip below.