Buy, Sell, or Hold Your Energy Stocks?

Since oil prices are beginning to provide more daily up-and-down thrills than any roller coaster you can think of, the best question is whether to push the "buy," "hold," or "sell" button for energy stocks these days. Indeed, with crude having jumped by $5 a barrel on Thursday, only to plummet by that amount and more on Friday, you're probably as confused right now as the next energy-investing Fool.

Let's see if we can bring order to this chaos. My approach is to divide the group into three sub-sectors: oilfield services, big integrated companies, and independent producers. (I'll save the refiners for another day).

The service providers
Keep in mind that the pullback in crude prices has caused most of the shares in this sector to slide since earlier in the summer. For our purposes here, I'm not going to predict where crude will be in three or six months -- because I can't -- but I will try to provide something of a perspective for looking at each of the sub-sectors. To do so, let's begin by considering the recent price performances of some of the better-known names in oilfield services.

Company

52-Week High

08/22/08 Close

Difference

Halliburton (NYSE: HAL  )

$55.38

$45.46

(17.9%)

Schlumberger (NYSE: SLB  )

$114.84

$97.26

(15.3%)

Transocean (NYSE: RIG  )

$163.00

$129.76

(20.4%)

Weatherford (NYSE: WFT  )

$49.98

$37.75

(24.5%)

It's important to factor in a key consideration involving the above companies and their stock prices: Because drilling activity doesn't ebb and flow as quickly as the price of oil changes, earnings expectations for the companies are nowhere near as volatile as are commodities prices. That means that each of the four oilfield services companies listed above is sporting a lower price-to-earnings ratio today than it was in, say, May. It also means that each is now cheaper for prospective buyers.

For instance, Transocean's forward P/E -- based on 2009 earnings expectations -- is now below eight times, or close to half that of the broader market. And each member of the above foursome has chalked up returns on equity above 17%.

My feelings about the service providers are that the companies probably deserve your careful attention. Sure, commodities prices could drift lower, and there are no guarantees that the companies' share prices won't continue to slide for a while. But the operative phrase is "for a while." In a normal investment time horizon, there's a lot to like about these and other providers of exploratory, drilling, and production help for the operators.

Big Oil
Let's now move on to ExxonMobil (NYSE: XOM  ) , which I'm using as a proxy for the integrated group. With crude prices giving ground -- and widening refinery margins unlikely to make up the difference -- the big integrated players will see their earnings dip. Beyond that, the group tends to move in lockstep. And, as I told Fools last week, Exxon has plenty going for it.

The independents
Finally, let's look at a couple of the independent producers. There's any number of companies we might have included here, but I'm going to call on Anadarko (NYSE: APC  ) and Chesapeake Energy (NYSE: CHK  ) . Like all independents, the companies are in the middle of a dichotomy: Their individual fortunes are improving steadily, while the commodities to which they're tied are temporarily falling. As such, they've given up more in share price than have the members of the other sub-sectors.

Anadarko and Chesapeake are two of the best-managed companies you'll find anywhere, regardless of industry. But with the duration of declining oil and gas prices uncertain, unless you're operating with a slightly longer-than-usual time horizon, you might want to let commodities prices bottom out before loading up on these or similar names.

Conclusion
While I believe that all the energy sub-groups are attractive over the intermediate- and longer-term, and therefore wouldn't counsel you to categorically avoid any of them, I nevertheless feel that the service names are the most attractive these days. So unless and until oil and natural gas prices reverse their slide, I'd urge you to spend lots of time getting to know the four service names mentioned above -- along with other members of their group.

Related Foolishness:

For three energy stocks that Motley Fool analysts believe will profit from "The Next American Oil Boom," check out our brand-new free report. You'll get three stock ideas from top analysts, plus some straight talk on our oil "crisis."

Fool contributor David Lee Smith doesn't have financial interests in any of the companies mentioned. He does welcome your questions, comments, or kibitzing. Chesapeake Energy is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.


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