7 Stocks Riding the Energy Wave

Step right up and get the latest oil-price forecast! Predicting oil prices has indeed become like a carnival, so what's an investor to do if he or she is uncertain about the magnitude -- let alone the direction -- of any changes to come?

There's hardly anything approaching a consensus on where crude is going. Goldman Sachs thinks $200 a barrel -- who'd have thought it? -- might be a target in the not-too-distant future, while Gazprom, the massive Russian gas producer, believes $250 might be in the offing by next year. But then there's David Herro, who oversees the management of about $20 billion for Harris Associates. He thinks we may indeed see prices head higher but that within a couple of years, they'll be back to $60 to $80 a barrel.

Conservation brakes
Herro bases his forecast on a couple of factors. He notes that, as most Fools know, demand has begun to slide in the U.S., Europe, and Japan, with more consumers learning to conserve by coordinating their automotive junkets. He also believes that within about five years, the standard internal-combustion engine will have been changed dramatically in the direction of real fuel efficiency.

In reality, all of these predictions may be accurate: We could hit $250 by 2009, only to fall back to the mid-double digits in 2012 or 2013 as we really jam on the conservation brakes. But regardless of what camp you fall into concerning the direction of the all-important black gold, it's still difficult to know how to approach energy investments today. Crude prices have doubled in just the past year, after all.

For my money, it's a must for Foolish portfolios to include a foundation of oilfield-services names, along with perhaps a couple of selected oil and gas producers. That approach, I believe, will provide you with a solid upside opportunity and enough downside protection to gird against a precipitous slide in hydrocarbon commodity prices.

King of oil service
Let's begin with the names that appear to make the most sense. I'd start with Schlumberger (NYSE: SLB  ) , the king of the services companies. Operating around the world, Schlumberger helps public, private, and government oil companies find and develop oil and gas reserves. Along with being the largest of the service providers, it's also the most geographically diverse and technologically proficient.

A crucial consideration with most of the service sector's players, including Schlumberger, is that big drilling projects have generally had their economics tested at prices far below current levels. That means it'd take a huge price pullback to negatively affect their business and their earnings. Therein lies much of the downside protection accorded to service investors.

I'm also a fan of Halliburton (NYSE: HAL  ) , the second-largest service provider that's also is a helper to oil companies around the world. One of the reasons I'm high on Halliburton is that I've seen CEO Dave Lesar streamline and redirect the company effectively during the past couple of years. Indeed, with the world's energy epicenter having moved from west to east, Lesar, in an effort to boost Halliburton's business, now divides his time between Houston and Dubai.

Seeing double
And then there are the twins of deepwater drilling, Transocean (NYSE: RIG  ) and Diamond Offshore (NYSE: DO  ) . With more of the meaningful oil discoveries occurring in water depths down to several thousand feet, the pair can't avoid having more business than you could shake a drill string at. And beyond that, Diamond, which has developed a habit of paying special cash dividends, now sports a trailing yield of 3.1%.

My weighting toward the service side reflects the producers' closer earnings ties to commodity-price fluctuations. That, of course, can be good or bad, but I still think it's important to have some producers packed into your portfolio. For starters, it's difficult to quarrel with ExxonMobil (NYSE: XOM  ) . The big kahuna of publicly traded oil companies offers more than its share of geographic diversity, technological strength, and managerial competence.

Producing prowess
I'm also becoming more amazed almost daily by the accomplishments at Chesapeake Energy (NYSE: CHK  ) , which, even though it's been public for less than 20 years, is verging on becoming the nation's largest natural-gas producer. This Motley Fool Inside Value selection, the leader in locating natural gas in shale plays, has treated its shareholders ever so well, thanks in part to its top-notch management.

Finally, you might think about putting a few shekels into Petrobras (NYSE: PBR  ) the Brazilian national oil company and Motley Fool Income Investor recommendation. The company has quite simply been the talk of the oil patch of late, with its string of big, deepwater discoveries.

This is but one way to approach the energy part of your portfolio. It's logical to expect that your research will uncover other ideas that are right for you. My only real request is that you make sure your portfolio absolutely does include an energy portion.

For related Foolishness:

Chesapeake is a Motley Fool Inside Value recommendation, and Petrobras is an Income Investor recommendation. Try either market-beating service free for 30 days.

Fool contributor David Lee Smith doesn't own any of the names mentioned above. He does welcome your questions, comments, or kibitzing. The Fool has a highly energetic disclosure policy.

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