It's probably best if you don't tell an energy investor that the S&P 500 has experienced a nice year of 12% growth so far, because oil and gas companies have not fared too well. The SIG Oil Exploration and Producers index is now down almost 24% this year, and with oil below $75 a barrel right now there isn't a whole lot of reason to think that this will rebound quickly.
It's not their fault. It's just that when you sell a commodity product like oil and the price for that commodity drops by more than 30% in a few months, no oil and gas producer will be safe from a pullback. There is one silver lining to this major slide in share price, though: It could be a great opportunity to pick up shares in that oil and gas producer you've been watching for a while at a discount.
So to give you a little help unearthing these tarnished gems, we asked our energy analysts which oil and gas driller is on their radar now that share prices are so cheap.
Matt Dilallo: Maybe its nostalgia, but the first oil stock I ever bought was ConocoPhillips (COP -0.41%). I've never sold a single share but instead have always added to my position on big pullbacks. With the stock now down more than 20% from its most recent high, I'm getting ready to go back to the well and buy some more.
There's just so much to like about the company. Its operations span the globe, its production is pretty well balanced between liquids and gas, and its balance sheet is as strong as it gets. Further, the company's focus over the past few years has been on growing its highest-margin production, so it has a lot of margin for safety as oil prices continue to fall.
This is simply one of the best pure oil companies in the world. With its stock now off its highs, it's a compelling play to capitalize on the sector's collapse, and in my opinion, it should top any list of best oil stocks to buy.
Maxx Chatsko: In 2013 Hess Corporation (HES 0.65%) boasted the highest liquids percentage of reserves among its closest peers, which, thanks to healthy margins for North American crude producers, helped it achieve the highest cash margin in the same group. Unfortunately, the events of the past several weeks now put companies that are highly leveraged to oil in a less favorable position. Investors are concerned that Hess may not be able to generate any free cash flow in 2015 if Brent oil averages $80 per barrel (the lowest price management has publicly considered).
However, it's important to remember that the company has among the lowest production costs in the industry for unconventionals -- reducing drilling costs 46% in shale plays since 2011 -- and offshore drilling. Hess enjoyed company-wide cash margins of $45 per barrel of oil equivalent in 2013 and similarly healthy margins so far in 2014.
But perhaps the most telling sign of the market's kneejerk reaction lie in the company's plans for 2015. Hess will see production from its Utica assets (which are 70% gas) nearly triple in 2015 and plans to bring 500 wells online there by 2020. When coupled with growing international gas projects, Utica will reduce the company's reliance on liquids and provide an alternative to soften the blow from weak oil prices.
Many oil producers will need to exercise discipline in their use of capital moving forward, but the market simply isn't considering the combination of operational efficiency and growth assets at the company's disposal.
Tyler Crowe: I'm going to look like I'm copping out here by picking an integrated oil and gas company rather than a pure producer. But I have to say I like the looks of Chevron (CVX 0.75%). Shares are down a much more modest 10% this year from some of the other more beaten-down stocks, but it's what lies ahead for this company that makes the share price today seem more compelling.
Between now and 2017, the company plans to bring 500,000 barrels per day of new production online, and most of that is in LNG export facilities, which are long-life cash generators. Once these big-ticket items become producing assets instead of capital consumers under construction, Chevron should see a big boost to cash flows and earnings.
With shares trading a valuation right around its 10-year historical averages and this big surge of projects about to go live, shares of Chevron might be at a bigger discount than what that 10% pullback might suggest.
