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Big Events Offer Big Oil Buying Opportunity

 November 08, 2012 10:31 AM

(By Kevin Donovan) We're a contrary sort.  Just ask any ex-significant other or current golf buddy.  With equities in full flight from Washington gridlock and recession fears, we think it's time to take positions again in big oil stocks.

Recall, we recommended exiting oil stocks early in the spring (see here) because we expected crude prices to track lower with a weaker global economy.  They did.  At that time, the front-month crude contract stood at about $100 per barrel.  West Texas Intermediate crude for December delivery is now trading at about $85 per barrel, down 4 percent on the day.  The front-month contract is nearing its 52-week low of about $79 reached in mid-summer.

[Related -Chevron (CVX): The Second Biggest Oil Seeker Joins The Dividend Yield Passive Income Portfolio]

In addition to the demand fears stoked by the election outcome (there is dismay the same cast of characters will grapple with the looming "fiscal cliff"), oil has also been hit by swelling supply evident in new inventory numbers from the Energy Information Administration.

Meanwhile, another storm is bearing down on the Northeast, landing another blow to national output.  Now Hurricane Sandy certainly affected wealth as it ravaged the densely populated eastern seaboard and will certainly crimp output in the short run, but if you believe as we do that the economy was already poised to gain vigor in the months ahead, recovery from the disaster should add fuel to an economic rebound and the price of fuel itself.

[Related -Chevron Corporation (CVX) Dividend Stock Analysis]

What's more, we're convinced the economy will pick up steam regardless of the election outcome.  Indeed, we're persuaded that in this age of Washington deadlock, a president has little leverage over the business cycle and the demand for energy.

We think the oil price will move higher because:

  • The Federal Reserve is gushing dollars.  Monetary policy is fully invested in full employment.
  • Consumer confidence is rising.  This is key to getting the most bang from those new Fed bucks.  To be sure, it is also vulnerable to government failure.
  • We think Washington will stop short of the so-called "fiscal cliff."  At the very least, the executive and legislative branches will agree to kick the can down the road, in our view. 

Of the major integrated oil companies, our top pick is Chevron Corp. (CVX), which was already battered before today's selloff after reporting weaker-than-expected quarterly results last week.  On a price-to-book basis, Chevron trades at 1.67, well below Exxon Mobil's 2.60.  It also offers a dividend yield of 3.26 percent versus 2.49 percent for Exxon.

Chevron has also lagged in performance this year, up 6.30 percent year to date compared with Exxon's 10.13 percent gain in share price.  In price action today, Chevron is down about 2.4 percent compared with Exxon's 2.68 percent slide and the S&P 500's 1.95 percent decline.

What's more, Chevron is positioned to take advantage of oil sands in Alberta, Canada, where a new study by the Alberta Energy Resources Conservation Board and Alberta Geological Survey has "identified immense oil and gas resources in Alberta's emerging shale prospects, suggesting a string of recent takeovers and land buys will yield impressive production gains for some of the world's largest oil companies," including Chevron, according to Reuters.  (See full story here.)

Buying oil stocks now is not without risk.  After all, it could be attempting to catch the proverbial falling knife and the sell-off could accelerate.  But picking a bottom is also an inexact science and we think the current downdraft offers an opportune entry point.


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