It's been an interesting week, with the Dow shifting in both directions by at least 70 points for five straight days. On Wednesday, we saw natural gas prices hit a 10-year low, as May futures traded below the Mendoza line with no real chance of increasing in the short term.
Couple this development with the March Oil Market Report from the International Energy Agency on Thursday, and we have ourselves a backdrop to discuss three promising energy companies.
The week that was
The week led off with a rocky start because of a disappointing non-farm jobs report, which showed growth numbers badly missing their expectations. Following that were fears of rising Spanish and Italian bond yields, sending the U.S. markets into a selling frenzy.
However, Tuesday night brought good news, when Alcoa started off earnings season with surprisingly good numbers, recording EPS of $0.09 compared with the estimated EPS of negative-$0.04. Thursday added more encouraging news, with a general consensus of good economic growth from China, as well as a healthy turnout for the Italian bond auction, delivering much-needed cash to Rome.
The party didn't last into the weekend, though, as Friday brought fear back into the market because China's GDP report didn't live up to Thursday's expectations and a spike in the Consumer Price Index triggered by higher food and gas prices rattled investor confidence.
All of this economic data can make energy-stock prices extremely volatile, but the energy-sector nugget to examine came out on Thursday, with the IEA's March oil report.
The good and the bad
The report highlighted the implied global stock build of 1.2 million barrels of oil per day. OPEC saw production gains leading oil supply to outpace demand for the first time since the beginning of 2009. However, this trend isn't being factored into the price of oil, because Tehran carries political implications once again. Iran could face diminished demand of 1 million barrels of oil per day, because of economic sanctions looming over its nuclear program. Armed with this information, oil prices increased on back-to-back days, rising by $1.44 on Wednesday and $1.85 on Thursday. After China published its GDP figures, oil futures retreated on Friday because of weakening demand slightly favoring oil supply and lowering future oil prices.
Primed to perform
Depending on the energy segment, oil prices can bring incredible riches or damaging losses. For instance, when crude prices are high, upstream oil companies in the business of exploring and producing oil can live high on the hog, by realizing increased margins. Conversely, the same high oil prices can be detrimental for downstream companies in the oil refining and marketing business. With that in mind, let's look at three companies from different energy segments that are positioned to perform in the current environment.
First off, we'll look at HollyFrontier (NYSE: HFC ) , the Dallas company that operates in the Mid-Continent, Southwest, and Rocky Mountain regions, with capabilities of processing crude oil capacity of 443,000 barrels per day. With crude prices rising, refining companies are seeing their already thin margins evaporate. HollyFrontier is able to capture strong refining margins because of its operating locations, mostly because of its access to high-quality West Texas Intermediate oil, which is priced considerably less than Brent or Light Louisiana Sweet oil. While these margins don't present a long-term moat for HollyFontier, they should continue to give the company an inside track into 2013.
Another great play that could be leveraged while crude prices are high and natural gas prices are at a 10-year low is National Oilwell Varco (NYSE: NOV ) . A number of E&P oil companies are changing their rigs from being equipped to drill natural gas to drilling for crude, a development that plays right into the hands of NOV since it's the largest supplier of rig equipment, with 90% of all rigs worldwide having parts supplied from NOV. National Oilwell has a tremendous outlook because of the current rig transformation, not to mention a steady income stream from rig repairs and maintenance.
Speaking of a tremendous outlook, Cheneire Energy (AMEX: LNG ) is expected to receive a decision from the Federal Energy Regulatory Commission in the next week on whether it can export liquid natural gas. A positive decision could be a game0changer for Cheneire, because it would allow the company to sell natural gas overseas, where the commodity fetches prices 5 to 7 times the amount paid in the United States.
Although all three of these companies are well situated in the current environment, they aren't the only great buys in the energy sector. Yes, Cheneire, National Oilwell, and HollyFrontier have lasting power, but they're relatively small players compared with these three solid stocks. Check them out in this free report, which we're offering for only a limited time. Check it out now and see what our top analysts have to say!