Top 3 Oil Stocks to Weather Any Storm

Goldman Sachs analyst Argun Murti warned that oil could hit $200 a barrel last May as crude prices hit the $123 mark for the first time. Now, University of Calgary professor Philip Verleger is predicting $20 per barrel oil as the global slowdown eats into demand while destroying anticipated supply. The lesson here is that nobody really knows where oil prices are headed, but that doesn’t mean investors should avoid the oil sector. Rather, investors should build a well balanced portfolio to weather any storm.

The first thing taught in university investment courses is the concept of diversification. The best way to reduce risk is to diversify holdings across many different sectors. Similarly, the best way to diversify risk within one sector is to choose different types of businesses within the sector. This ensures that even if one sector falls, the others will rise to make up for it. The result is smoothed portfolio performance during even the roughest of economic times.

The oil sector has several different players:

• Drillers – These are the companies that take the oil out of the ground, either on land or under the sea. One of the best oil driller plays is Petroleo Brasileiro (PBR), also known as Petrobras, which discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro.
• Shippers – These are the companies that take the oil from Point A to Point B by shipping it across the ocean. One of the best oil shipping stocks is Frontline (FRO), which is trading at a very low earnings multiple with a high dividend yield.
• Refiners – These are the companies that take crude oil and refine it into gasoline and other usable substances for consumers. One of the best refiners in the business is Marathon Oil (MRO), which has combined exploration with refining to create a strong business.

Owning these three stocks can help investors gain prudent exposure to the oil industry. Higher oil prices can boost prices for drillers, but could put pressure on refining margins and vice versa. Meanwhile, shipping companies rely more on demand than just pricing. Remember, increased supply with consistent demand could lower prices without lessening demand. All in all, diversification, even within a sector, can help reduce risk.

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