Six months ago, it was pretty easy to pick a favorite energy stock. Today, though, it's not quite so simple. With Brent crude below $75 -- the lowest we have seen it since the recession -- many of the companies that were riding high on the hog don't look to be as lucrative as they once were.
There is one bright spot to all this chaos, though. In the wake of this major dip in oil prices, the market has a tendency to act very, very irrationally, and the investor who is able to look beyond the sensationalism behind the stories of oil prices can identify some great companies that are either 1) built to handle a downturn in the commodity cycles and will come out the other end looking like a gem, or 2) do business in a sector that is completely uncorrelated with oil at all.
We have asked our energy analysts to identify a few of their favorite stocks that fit this bill; here's what they came up with.
Jason Hall: The precipitous fall in oil is a reminder that many energy companies are in a commodity business that's largely controlled by a cartel -- OPEC -- that can affect the price of oil with fiat decisions about production. Right now, there's a pretty clear indication that OPEC is in a standoff with domestic producers to retain market share, and that could mean a protracted period of low oil prices. Those low prices are nice at the pump, but uncertainty is the bane of successful investing.
However, there's a segment of the energy business that's largely removed from oil prices, growing like wildfire, and likely to see that trend continue for years to come: distributed solar. The best company in this segment? SolarCity (SCTY.DL).
Image Source: SolarCity.
SolarCity has grown its business -- measured in total megawatts deployed -- by almost double or more every year since 2010, and it is projecting MW deployed growth of more than 80% annually through at least 2018. The company is also projecting to reach 1 million customers by mid-2018 -- 83% more customers than today.
SolarCity has been a fantastic investment so far, but the best growth prospects are ahead. The company has more than $4 billion in revenues already under contract for the next 20 years, and that 1 million customer target represents less than 3% of the potential customers in SolarCity's current markets. Factor in the move to begin making its own panels, and SolarCity could very well extend its lead over the competition. SolarCity's business model isn't subject to the whims of a cartel fighting for market share.
The stock has rocketed up 330% since its IPO, but it is actually down 32% from the August peak. Now's a great time to buy this long-term winner.
Matt Dilallo: The plunge in oil prices reminds us that low-cost production really matters. When it comes to shale, no one has lower costs than EOG Resources (EOG -0.48%), as it can still profitably drill its core plays even if oil collapsed to $40 per barrel. That's a big competitive advantage, and the reason it's my favorite energy stock right now.
Tyler Crowe: I have no idea when this market is going to turn around, but what I do know is that I have a pretty long-term investing time horizon. Knowing this, I can't think of a better stock to buy than National Oilwell Varco (NOV 0.16%).
The company isn't really dependent on oil prices, but rather oil and gas drilling activity, since it supplies just about every single piece of equipment to the industry, from drill bits to ultra-deepwater rigs. Of course, we can expect that with a decline in oil prices, there will likely be a decline in drilling activity until the forces of supply and demand get back in line. However, National Oilwell Varco has proven that it can maneuver through downturns in the industry very well.
Source: National Oilwell Varco Investor Presentation.
NOV has proven time and time again that it is one of the best in the oil and gas equipment & services industry, and with shares trading at just over 11 times earnings today, I can't think of a better time to buy.
