Where you can find black gold

In yesterday’s post, I discussed the importance of having some long oil exposure in your portfolio as most businesses are generally hurt by increasing oil prices. But, if you’re like me, and not an expert oil trader. It can be daunting to go out and buy an oil ETF like the Goldman Sachs Crude Oil Total Return (OIL) or maybe even a Powershares DB Crude Oil Double Long (DXO). So, where else can we look?

Oil Majors

unsustainable

Probably the most correlated stocks to the overall price of oil, it could be a dangerous time to be investing in the oil majors who have juiced their share prices with huge dividends and buybacks over the last few years. As mentioned in WSJ’s Heard on the Street Blog, just a year of oil prices under $60/barrel could put these capital distributions at risk. 

Refiners
Oil refiners make their profits off of the spread between distilled products and oil prices. Demand for refined products – i.e. gasoline, diesel, etc. – ultimately effects demand and the price of oil. During the recent commodity bubble, increases in the price of oil uncharacteristically lead increases in the prices of refined products (a clear sign that fundamental demand was not responsible for the run in oil prices). Then, as the economy sputtered, refined product prices tumbled and lead oil down as expected. This double whammy has taken its toll on refiners bringing profits down in excess of 50% for most refiners. Their stocks have been hit equally as hard and are now trading at huge discounts. As the market stabilizes and demand for refined products returns, margins will likely improve and widen ahead of any significant rebound in oil prices. A few top names include: Holly Corp (HOC), Valero (VLO), Sunoco (SUN), and Tesoro (TSO).

Oil & Gas MLPs
While the oil majors – RD Shell (RDS.A), Exxon Mobil (XOM), Marathon Oil (MRO) – have been supporting their stocks through massive buybacks and increasing dividends, such distributions could be at risk should oil prices stay far below $60/barrel for more than the next year. Smaller Oil & Gas MLPs have similarly large distributions (read: dividends) and many have entered serious hedging contracts that could keep dividends safe for up to the next two years. For more on this interesting asset class and a few interesting names check out my post on Exploration and Production MLPs.

Solar Companies
Solar companies are not quite as correlated to oil, but definitely benefit from increasing oil prices and general energy policy awareness. More importantly, demand for solar products should be supported by government subsidies for the foreseeable future. The timing could be fortuitous as solar companies will be supported by government dollars as they fast approach grid parity and will hopefully be widely able to deliver on a non-subsidized basis just as oil reaches its next rally. Top companies include: First Solar (FSLR), Suntech (STP), SunPower (SPWR), LDK Solar (LDK) and Kyocera (KYO)

Full Disclosure: Long shares of STP and VLO at the time of writing.

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Comments

[...] A look at the bull and bear cases for oil. But, more importantly, a look at how to you can use oil exposure as a diversifier in your portfolio. Part one of a two part series. The second part looks at stock plays you can use to establish oil exposure without having to directly bet on the price of oil one way or another. It can be found at Where to find Black Gold. [...]

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