Wondering what's driving up oil prices? So is everyone else.
The Department of Energy has shown sustained gains over the past few weeks. "So, we know that it is not the lack of oil," says Andrew Horowitz of The Disciplined Investor.
According to Horowitz, global growth is slowing, which is why oil companies are seeing their inventories pile up. "Either we will see demand pick up, or oil prices should drop."
But then Iran entered the picture, and if the tensions turn into a situation that ebbs the supply of oil, headlines will bring prices up. Of course, if things do not escalate, oil companies must rely on rising demand to bring up prices.
But even that may be difficult. According to Barbara Powell of Bloomberg, "U.S. gasoline demand sank 14 percent from the prior week to the lowest level in more than seven years of records ... Drivers bought 8.16 million barrels a day of gasoline in the week ended Dec. 30, down from 9.46 million the week before." The data was sourced from MasterCard's SpendingPulse report.
It seems increasingly likely piling inventories and lower demand will drop oil prices, so why are so many investors trading as if oil prices will go up?
Business section: Investing ideas
If you're worried about the risks associated with the oil sector, it might be worth looking at the low-debt companies that have had sustainable revenue trends over the last year.
With that in mind, we wanted to screen for low-debt oil stocks that have encouraging profit trends, as defined by the DuPont system.
In case you don't know about the system, here's a quick explanation:
There is a lot more to profitability than whether a company's bottom line is increasing. Profits can come from several sources, with some better than others.
The DuPont system analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
We focus on companies with the following positive characteristics: Increasing ROE along with...
- Decreasing leverage, i.e., decreasing Asset/Equity ratio
- Improving asset use efficiency (i.e., increasing Sales/Assets ratio) and improving net profit margin (i.e., increasing Net Income/Sales ratio)
Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.
All of the names mentioned below have positive DuPont trends and low levels of debt. Are these relatively safe ways to gain exposure to the oil market? (Click here to access free, interactive tools to analyze these ideas.)
2. CARBO Ceramics
3. National Oilwell Varco
4. Oceaneering International
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Accounting data sourced from Google Finance.