Q: Are the oil and gas markets doomed?
Valuentum’s Brian Nelson: In short, no. For one, if we thought the oil and gas space (XLE) were doomed, we would not be holding onto Chevron (CVX), Kinder Morgan (KMI), and Energy Transfer Partners (ETP) in the Dividend Growth portfolio. Instead, I think what we are witnessing in the oil and gas market is a flight to quality and balance-sheet strength.
Our outlook for oil and gas equities has not changed before or after the recent fall in energy prices. Valuentum’s thesis accepts the fact that crude oil (USO) and natural gas prices will be extremely volatile, and that’s why we’ve gravitated toward firms such as Chevron, which has the strongest balance sheet among the majors, and Kinder Morgan and Energy Transfer Partners, whose business models are tied more to midstream volumes than oil prices themselves.
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May 6, 2014
Why We’re Keeping Chevron As Our Favorite Dividend Growth Idea in Big Oil
Chevron is our favorite dividend growth idea among the energy majors. Though we don’t necessarily dislike its peers, we think the healthier the balance sheet, the better the dividend expansion through the course of the volatile and unpredictable energy price cycle.
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We continue to believe that crude oil prices will decline in the near term, but will rise over the long term. Our comprehensive outlook for crude oil and natural gas prices calls for $60 per barrel as a probable downside case. We think the volatility of the oil and gas market speaks to the importance of using a range-of-probable outcomes approach, something core to the Valuentum process:
Comprehensive Outlook for Oil & Gas Prices: /20130609
For risk-seeking investors, two stocks that are most exposed to a potential rebound in crude oil prices are Continental Resources (CLR) and EOG Resources (EOG). However, even as we highlight these two firms for consideration, we don’t intend to add them to the newsletter portfolios at the moment and are content with our existing exposure.
Remember, the core of the Valuentum process rests on resisting the urge to add stocks that are going down. We prefer undervalued stocks that are exhibiting strong upward momentum, or Valuentum stocks. This allows us to avoid value traps. We’re less interested in timing the exact bottom than we are in capturing the vast majority of the stock price cycle.
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As you can see below, right now, value investors (red B) may be interested in jumping head first into the energy sector, but we’re still being patient until we see a definitive turn in equity prices (blue B). The Valuentum strategy has the greatest profit potential of any strategy and with less risk.
