Crude Heading Toward $50: Buy 5 Low-Levered Oil Stocks

Oil touched multi-year lows, raised a panic alarm among investors and led many energy players to bankruptcy. After months of waiting for the commodity to bottom out, it recently started to show a rally. So has oil finally started taking a U-turn after its prolonged weakness?

If we compare the current crude price with the multi-year low mark that the commodity touched in February this year, there is definitely a huge improvement. Some analysts are also hopeful of oil touching $50 per barrel in the near term – a level unheard of for a really long time.

Looking Back

The weakness in oil prices that started in mid-2014 continued in 2015 and spilled over into 2016 and dragged down the markets several times. Data wise, in mid-February, West Texas Intermediate (WTI) crude fell to a 12-year low mark of $26.05 per barrel that also forced the S&P 500 index to touch its lowest level since Apr 11, 2014.

Definitely the continued crude weakness during the beginning of this year hammered energy players during the first quarter. This was reflected in the Zacks Earnings Trend report which reveled that the oil/energy companies included in the S&P 500 index witnessed year-over-year earnings decline of 107.8% as compared to a fall of 78.6% in fourth-quarter 2015. In other words, the magnitude of earnings decline in the first quarter increased significantly from that of fourth-quarter 2015.

Oil Recovery

Naturally, the $48.08 per barrel mark at which WTI crude closed trading yesterday reflects a remarkable improvement of over 84% from its lowest level in February. This massive recovery primarily came on the back of supply disruption from Nigeria and Canada amid sustained global demand.

In Nigeria, attacks by a militant group called Delta Avengers on oil installations led to a shut down in production. Nigeria reduced its crude production to 1.4 million barrels per day (bpd), hitting its lowest level in 27 years. The group recently bombed an offshore platform owned by Chevron Corporation (NYSE:CVX) . Among the other attacks, this group targeted a series of refineries and an export terminal.

In Canada, the Alberta region has been ravaged by a wildfire for two weeks that has threatened the major oil sands’ production facilities.

Those events collectively led The Goldman Sachs Group, Inc. (NYSE:GS) to believe that the oversupplied crude market has taken a turn toward deficit territory. In fact, the firm projects crude to trade around $50 per barrel in the second half of this year. For 2016, the bank predicts average WTI oil at $45 per barrel, much higher than its previous estimate of $38 per barrel.

Why Low Leverage Players?

Against this bullish backdrop for oil, investors can pick low leverage companies with good fundamentals to outperform the market. By low leverage firms we mean companies that have a low long-term debt to capitalization ratio.
If we dig a little deeper, we’ll see that the prolonged low oil hammered energy players and drowned them in huge debts. Some players even went bankrupt and were delisted from stock exchanges. So, we have opted for low leverage companies.

Definitely the optimistic run in crude brings good news for upstream energy players as their business is positively correlated to oil price. In fact, exploration and production activities may now be stepped up to tap the long-awaited opportunity of selling crude at higher prices.

Drilling players that assist in exploration and production will also be benefited. Moreover, energy infrastructure players will gain from an expected increase in demand for oil transportation and storage following a likely growth in production.

Here, we have picked five energy stocks that have a low long-term debt to capitalization ratio compared to their industry average. Each player also carries a favorable Zacks Rank #2 (Buy).

Hercules Offshore Inc. (NASDAQ:HERO)

Houston, TX-based Hercules Offshore is an offshore drilling player that provides services to upstream energy players involved in oil and gas exploration and production operations. Long-term debt to capitalization ratio for the company is 10.7%, which is much lower than industry average of 30.8%.

Independence Contract Drilling Inc. (NYSE:ICD)

Houston, TX-based Independence Contract Drilling is an onshore drilling contractor. The company has a long-term debt to capitalization ratio of 20.8%, which is lower than industry average ratio of 30.8%.

Contango Oil & Gas Company (NYSE:MCF)

Also based in Houston, TX, Contango Oil & Gas has a long-term debt to capitalization ratio of 25.2% versus the industry average of 44%. This upstream energy player involved in the exploitation and production of oil and gas resources in U.S. thus looks well placed.

World Point Terminals LP (NYSE:WPT)

St. Louis, MO-based World Point Terminals involves in operations like development and acquisition of storage terminals for crude oil. The partnership has a long-term debt to capitalization ratio of 0.0% as compared to the industry average of 44.2%.

NuStar GP Holdings LLC (NYSE:NS)

San Antonio, TX-based NuStar GP Holdings has an ownership interest in NuStar Energy L.P. (NYSE:NS) . The partnership involves in the transportation of crude and petroleum products. It has a long-term debt to capitalization ratio of 0.0% compared to the industry average of 52.8%.


NUSTAR ENERGY (NS): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

CHEVRON CORP (CVX): Free Stock Analysis Report

HERCULES OFFSHR (HERO): Free Stock Analysis Report

NUSTAR GP HLDGS (NSH): Free Stock Analysis Report

WORLD POINT TER (WPT): Free Stock Analysis Report

CONTANGO OIL&GS (MCF): Free Stock Analysis Report

INDEPENDC CONTR (ICD): Free Stock Analysis Report

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