OFF THE WALL: Is it time to invest in oil stocks again?

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By Daniel de la Rosa

Is it time to buy an oil stock? I mean, would you buy Exxon Mobil at this point? Or Chevron?

As I write this, Chevron is trading at $81, very much within hailing distance of its 52-week low at $80.20.

Exxon Mobil, which at one time was the most valuable company in the world before Apple came along, is trading at $76, also pretty close to its 52-week low of $75.62. Warren Buffett, who used to count ConocoPhillips and National Oilwell Varco among his biggest energy holdings, has totally eliminated his position in both companies.

I was also invested in ConocoPhillips, having opened a position at $62, about two years ago. I got out when it fell to $70. Maybe I should have gotten out sooner. The thing is if Buffett has dumped nearly all of his oil stocks, why hang around? Much less think of opening a position. The reason for the collapse of oil company stocks? Fracking.

Shale oil used to be impossible to get to. But fracking and advances in technology have allowed oil companies to jack up production and flood the market with large new supplies.

The upshot is that the U.S. has again become a leading oil producer and OPEC, led by the Saudis, decided against cutting back output to keep market share. The result is a glut and a price crash in oil values. Oil prices have sunk from over $100 a barrel to under $50. The ones who took it on the chin and got their guts ripped out are the oil companies.

The stock of Chevron went from a year peak of nearly $130 to $80. Exxon Mobil had traded as high as $100-plus and dropped 25 percent.

But all that is history.

If you are a retail investor, these oil companies are starting to look pretty attractive, especially on what stock pickers call a valuation basis.

The price/earnings ratio of Chevron is 12, that of Exxon is 13.5. The average in the market is close to 17 or 18. The P/E of a biotech company like Regeneron is 141. What that means is that these stocks are undervalued. Another way to put is they’re awfully cheap.

Let’s go to yield. The annual dividend for Chevron is $4.28, a yield of over 5 percent. For Exxon, it’s ‘only’ $2.92, which gives a yield of over 3 percent. Seems like a no-brainer, right?

Good oil companies with a healthy balance sheet that is currently undervalued and trading near their 52-week lows. Healthy dividends too.

Normally, I would open a position at least in Chevron, given the dividend and the fact it should have room to run after they come out of their swoon. But the wild card in all this is a commodity like no other: oil. The current low oil prices should result in a situation where eventually production will be cut back in say, two to three years.

At that point, demand should start coming back if global economies get stronger.

The question for all those brainy fund managers or brokerage analysts in places like BlackRock or JP Morgan who are looking at the oil sector is how fast that scenario will play itself out. Will the world economy get stronger? Will China’s economy roar back? Why China? They’re the biggest consumer of oil in the world, and demand from them will help oil companies’ stock going forward.

So you got a lot of question marks about oil stocks? Logic says buy now.

At some point in the months ahead, the crash in oil prices will end and the commodity they call black gold will go up again, lifting oil stocks along with it.

I remember 17 years ago when the price of oil sank to $10 a barrel and the price of gasoline at the pump was under $1 a gallon. All the smart guys then said prices were going to stay low for a number of years. They were wrong.

It’s a really basic rule in commodities, especially in oil. Low prices leads to low production and then economies get stronger. Demand goes up and prices follow suit.

Same thing happened when prices were over $100 a barrel. Everybody was saying high prices are here to stay. No one was predicting sub-$50 oil.

For retail investors out there, the decision you have to make is whether the bottom is in for oil stocks.

Me? I’ll probably do a coin flip whether to put any money down or not. After that, I’ll toss the coin a couple more times. Chances are I will not be able to make up my mind.

‘Off the Wall’ is a regular column on the stock market. The comments are the author’s own, and are not meant to recommend the buying or selling of stocks.

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