Is the Worst Over For Energy Stocks?

Picking highs and lows in any market is dangerous business. However, for long-term investors looking for bargains in the energy sector, it looks like the long-awaited bottom in crude oil might finally be forming, which in turn offers hope for energy companies ahead.

The global oil supply glut and weaker demand exacted a tough toll on the energy market over the last year. The price of a barrel of West Texas Intermediate crude oil hit a 12-year low in January, touching the $26 mark, but has since recovered to near $40. This compares to more than $100 per barrel in summer 2014.

Financial pros understand that markets have a tendency to overshoot both on the upside and the downside and crude oil might have simply fallen too far. "The real story here is that the energy market got ahead of itself again with the negativity -- $25 a barrel was at the low end of all the reasonable models and so a bounce was in the cards," says Hilary Kramer, editor of the GameChangers stock newsletter.

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Kramer is in the camp that a bottom could be in for crude oil. But, she leaves open the door for one more retest of the recent lows. "Oil is traditionally strong through September, so $40 may serve as something like the bottom as we look toward the summer," Kramer says.

Charles Sizemore, founder of Dallas-based Sizemore Capital Management, agrees. "I do think it is very likely that crude oil prices have seen their bottom. It will ultimately depend on Saudi Arabia and the other major producing countries. ... No one has a vested interest in crude oil prices going lower from here."

Some tough times. The first quarter saw energy stocks rebound from a tough 2015. "Big Oil came back the most broadly over the last quarter, followed by the drillers and the independent producers. That tells me that the market is no longer holding its breath over apocalyptic risk at this end of the industry," Kramer says.

The energy sector outperformed the Standard and Poor's 500 index through April 8, with a 3.9 percent gain, versus an overall 0.2 percent rise in the index. Within the energy sector, the "integrated oil and gas" stocks, or the so-called super majors like Chevron Corp. (ticker: CVX) and Exxon Mobil Corp. (XOM) saw a solid 6.6 percent gain in the same period.

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However, rising crude oil prices have actually hurt some energy companies. "Downstream energy firms, or refiners have been among the worst performers so far this year," says Elliott Gue, co-editor of the Energy and Income Advisor newsletter based in McLean, Virginia. "Rising oil prices are generally a negative for refining margins and these stocks have also been negatively impacted by the end of the U.S. crude oil export ban and tightening price spreads between U.S. and global oil benchmarks."

Now might be the time to invest. If you've been shying away from energy stocks waiting for the storm to pass, analysts say now could be a good time to consider adding certain beaten down names to your portfolio. "I would still stay focused on the higher-quality names. I wouldn't be in a hurry to buy something like a Chesapeake Energy because I still see a lot of risk there. But the oil majors look reasonably safe at current prices," Sizemore says.

The outlook is improving for some portions of the energy sector, but it's probably not the time to rush in and throw a dart. Stock selection still remains key. "Investors will need to be patient as oil prices will remain volatile for some time and we're unlikely to see a V-shaped recovery in energy stocks over the next few years. We recommend buying high-quality names on dips over the next few months," Gue says.

"I'm particularly excited about the prospects for the midstream space, and I find it interesting that both Berkshire Hathaway (BRK.A, BRK.B) and David Tepper's Appaloosa Management have been heavy buyers in that space," Sizemore says.

Here is a look at six energy stocks analysts like now.

Antero Resources Corp. (AR). Antero Resources is an independent oil and natural gas company that is "an aggressive competitor in natural gas that can effectively turn the spigot to manage cash flow in a wide range of price environments. At these levels it looks incredibly cheap," Kramer says.

Helmerich & Payne (HP). Helmerich & Payne is involved in contract drilling of oil and gas wells in the U.S. The stock looks like a winner in the drilling group, Kramer says. "They've got plenty of cash to weather any additional shocks and keep paying what is currently an attractive 4.8 percent dividend."

EOG Resources (EOG). The company has quality acreage in the Bakken Shale of North Dakota, the Eagle Ford of southern Texas, the Marcellus of Appalachia and the Permian Basin of west Texas. Since these are high quality plays with relatively low break-even costs, EOG can produce some of its wells profitably even with oil in the mid-$30s per barrel, Gue says. "EOG also maintained discipline over the years, using cash flows to fund most of its drilling activity rather than aggressively borrowing to fund expansion. As a result, EOG has low net debt and a low cost of capital, which would allow the firm to make strategic acquisitions of assets from distressed sellers over the next few years. We recommend buying EOG on dips below $63."

Magellan Midstream Partners (MMP). Magellan is one of the higher quality midstream master limited partnerships with a yield of about 4.9 percent right now, Gue says. The firm's main business is refined products pipelines that carry commodities like diesel and gasoline. "This is an extremely stable business with minimal commodity price sensitivity since pipeline owners are paid based on the volume of products moving through their system not the value. In fact, falling gasoline prices have been a boon for Magellan as the U.S. experienced a record-demand summer driving season last year that translated into record gasoline volumes across Magellan's system. This high-quality MLP has a low cost of capital and an investment grade credit rating, so it will have little difficulty funding expansion projects planned over the next few years. We believe it's a strong buy on any dips under $55 this year," Gue says.

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Kinder Morgan (KMI). The pipeline giant transports natural gas, refined petroleum products, crude oil and other energy products. "Both Berkshire Hathaway and Appaloosa made major purchases at the end of last year, and I expect that both have added to their positions in the first quarter," Sizemore says. "Investors turned on Kinder Morgan when it cut its dividend last year. But post dividend cut, Kinder Morgan is about as close to riskless as a company can be. It has no need to access the capital markets this year, and its pipelines continue to throw off a lot of cash."

Enterprise Products Partners (EPD). Sizemore says the company is a master limited partnership and provides pipeline services to energy producers and consumers. "This is arguably the bluest of blue chips in the MLP space, and it currently yields a very attractive 6.5 percent," he says.

Kira Brecht is a financial journalist who writes extensively on stock, commodity, and foreign exchange markets, investing strategies, the economy and the Fed. She was managing editor at SFO (Stock, Futures & Options) Magazine for 10 years, creating digital magazine, newsletter and online content aimed at the individual investor. She began her career on the floor of the Chicago futures exchanges covering commodity markets for a financial newswire service. Follow her on Twitter @KiraBrecht.