We get it, oil prices are down more than 50% over the past seven months, which scares the bejesus out of investors who have any exposure to energy stocks. However, this doesn't mean you should be selling out of the energy sector. In fact, buying opportunities are all over the place.
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So we asked three of our energy analysts to tell us which companies they have bought recently, and why they bought them. This is what they said.
: Ifinallybought a few shares ofCore Laboratories this month. I say finally because I've been eyeing the stock for years while I waited for a pullback on a valuation that was too rich for me. That big pullback finally came courtesy of the oil price crash over the past few months. When thecompany issued weak first-quarter guidanceI decided it was time to pounce.
I believe two factors make now the time to buy, apart from the fact that Core Labs' oil-field technology business is critical to the industry.
First, the reason for Core Labs' weak guidance, which resulted in a double-digit sell-off in its shares at the time, is that its margins are going to get creamed this year. It sees a 60% deterioration in margins over prior levels. However, Core Labs has the best margins in the oil-field service sector even with the near-term squeeze, so its numbers will still be pretty good. Furthermore, it is taking steps to rightsize its business, so margins should improve later this year. This suggests the margin compression should be temporary.
In addition, I'm growing more confident that theprice of oil will rallylater this year. That would lead to improved oil and gas activity and more business for Core Labs. Crashing crude prices sent Core Labs stock down, so, an oil rally would likely lead to a stock rally for Core Labs as well.
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Add it up and I see limited downside and a whole lot of upside. That's why I'm buying Core Labs.
Jason Hall:I watchedPhillips 66 closely for about a year before finally buying the stock late last month. It might seem like a relatively boring business -- and it largely is -- but that's a great thing. I own my share of more "exciting" growth stocks, but at least a portion of every portfolio should be devoted to slower growing but steadier businesses.
Why Phillips 66? A few things stand out. The core refining business isn't expected to grow much, but it is a cash cow. The company can use this cash in a number of smart ways, including paying a sustainable dividend, investing in its growing pipeline and petrochemical businesses, and offering one of the best-run share buyback programs in the energy sector.
The dividend might not look sexy at a 2.8% yield, but it has more than doubled since 2012, and management is committed to increasing it at "double-digit rates" for the foreseeable future.
Furthermore, cheap American natural gas and -- even with the slowing production in 2015 -- what looks like long-term strength in U.S. oil production will be great for both the midstream and chemical businesses for years to come.
While the stock has rebounded strongly since bottoming on Jan. 15, shares are still 11% below the 2014 peak. At today's prices, Phillips 66 remains a great buy for long-term investors.
Tyler Crowe: I also added to my position in Core Labs within the past couple of weeks, but Matt already covered that one, so instead let's look at the other position I added to: National Oilwell Varco .
There are a few similarities between Core and National Oilwell Varco, and one of those traits that is nearest and dearest to my heart is that they are both superior generators of free cash flow. Since 2006, Varco has maintained an unlevered free cash flow margin greater than 10%, meaning it generates more than a dime of free cash flow for every dollar of sales. This gives the company immense financial flexibility to make loads of acquisitions -- as it has over the years -- and increase its market share in the manufacture of drilling equipment. At last count, Varco had more than 60% market share in the sales of offshore drilling equipment.
Shares have been taking a beating because oil prices are down and there is an oversupply of drilling rigs out there today. When this happens many equipment owners try to milk older equipment for all they can, meaning fewer orders for National Oilwell Varco. However, the company has more than $12 billion in orders to complete, so there is plenty to keep it busy until the market heads back up. After all, a company can only run older equipment for so long before it becomes too worn out to be useful.
I have no idea how long it's going to take for this recovery to happen, and personally I'm not worried about it with National Oilwell Varco or Core Labs. It will happen eventually, and when it does both companies are very well suited to take advantage of the recovery. That's why I'm loading up on shares now.
The article 3 Great Energy Stocks We're Buying Now originally appeared on Fool.com.
Jason Hall owns shares of Phillips 66. Matt DiLallo owns shares of Core Laboratories and Phillips 66. Matt DiLallo has the following options: short August 2015 $50 puts on National Oilwell Varco. Tyler Crowe owns shares of Core Laboratories and National Oilwell Varco. The Motley Fool recommends Core Laboratories and National Oilwell Varco. The Motley Fool owns shares of Core Laboratories and National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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