The oil and gas industry's recovery has been moving at a glacial pace. Even though capital investment into new and existing production has declined significantly in the past two years, we have yet to see a response in production that should lead to a price recovery. For long-term investors, though, this has just extended the window in which they can buy stocks at pretty cheap valuations and simply wait for the recovery to come.
With this idea in mind, we asked three of our energy contributors to highlight a stock they see as a great investment in August. Here's what they had to say.
The go-to expert for reservoir maximization
Jason Hall: Core Laboratories N.V. (NYSE:CLB) is exactly the kind of company to consider buying right now, as oil prices continue to remain stuck in between a market that wants to push them higher and global production that's still exceeding demand growth.
What makes Core special? In short, knowledge and expertise. Core doesn't own drills, lease mineral rights, pump oil through pipelines, or turn crude into gasoline. Instead, the company's specialty is working with oil and natural gas producers to manage their oil reserves, maximize how much product they recover, and how much it costs to produce it. That makes a company like Core just as important today, with oil prices still below $50, as it does with prices are much higher. In a way, cheap oil can make Core even more important, as oil companies find themselves having to stretch every dollar that much further.
Core is an industry leader in its field, and its business model, which doesn't require huge amounts of capital, equipment, or high fixed costs, has it ideally positioned to continue to operate profitably even as the downturn persists, but also set to benefit in a big way when producers start spending on capital projects again.
And since it's not clear when spending will open back up, investing in Core Lab today is a great way to position yourself for that future opportunity, while owning a company that's likely to remain profitable in any oil market.
Flying under the radar
Tyler Crowe: Pipeline master limited partnership Holly Energy Partners (NYSE:HEP) doesn't get a lot of attention because of its smaller size and its fly-under-the-radar approach to business, but it has some of the ideal qualities that you want in a master limited partnership you can buy and hold for a long time. The first is that 100% of its revenue comes from fee-based services rather than commodity-tied prices, that makes the company's quarterly cash flows very predictable and gives its management team a lot of visibility for how it can pay shareholders today and into the future.
The second quality that makes it a smart investment is a prudent management team. Holly Energy Partners' management has been very adept at investing in projects with a high return rate as well as maintaining a payout policy that leaves the partnership some excess cash to invest in those opportunities rather than be wholly reliant on the capital markets for funding. These are the qualities that have allowed it to raise its quarterly payout every quarter since it IPO'd in 2004.
The reason it looks attractive today as an investment is that the market still seems to be viewing this stock under the same lens as other master limited partnerships with bloated balance sheets and dwindling growth opportunities. At a distribution yield of 6.95%, shares of Holly Energy Partners look to be a great opportunity in August.
The "non-consensus" bet
Matt DiLallo: Over the past year, Permian Basin-focused driller Parsley Energy's (NYSE:PE) oil production is up a breathtaking 82%. That is a stunning number considering that most oil companies do not even have the financial wherewithal to keep their production rate flat right now, with many just trying to survive. Instead, Parsley is thriving because it has the capital and the asset base to drive robust production growth amid one of the toughest downturns to hit the industry in decades.
The company is using its resources to its advantage. CEO Brian Sheffield noted that while it's made a "non-consensus decision" to maintain its production growth pace this year, that plan is paying off because it enabled it to push its costs down. In fact, over the past year, its lease operating expenses are down 17%, while general and administrative expenses plunged 32%. Those falling costs, when combined with its remarkable production growth, fueled a surprising profit last quarter.
Parsley Energy is a well-oiled machine. According to Sheffield, the company has the asset base and the organizational capacity to "support top-tier growth for years to come." So, for investors looking to make a non-consensus bet on the oil market, Parsley Energy is an oil stock to consider buying this month.