To start 2015, we are finally starting to witness the effects of oil prices that are simply too low for many companies to produce it profitably. In January alone, companies around the country announced plans to trim 53,041 jobs. Of those, some 40% were tied to the oil markets.
Investors, myself included, have also felt the pain from the drop in oil prices. The price per barrel fell under $80 in October 2014 and has stayed there, after more than five years of consistently floating above that level. Though prices have bounced off their lows of late January, it has been a weak bounce. Using the Energy Select Sector SPDR Fund (NYSEMKT:XLE) as a proxy, the energy sector is still underperforming the S&P 500 this year, and much more meaningfully since July 1 of last year.
Whenever an entire sector sells off in this fashion, analysts begin trying to call the "bottom." But that's no small task. Many thought they called it in October, only to be completely upended by OPEC's announcement on Nov. 27 that it would maintain production levels. Since that time, folks have resigned themselves to picking which quarter of the year might finally bring an uptick in prices.
Trying to call a bottom or rebound for oil prices is a fool's game, one this Fool is not willing to join -- for good reason. Just look at these headlines:
Safety in diversity
A couple months ago, the uncertainty around the oil market prompted me to start expanding my watchlist. At the time, I had been trying to diversify myself away from energy because it had performed so well heading into last summer. Now my list has reverted back to "basics," and most folks will recognize the name at the top: General Electric Company (NYSE:GE).
Until a couple years ago, GE was an industrial conglomerate with a hefty financing arm. However, it has over time become a key player in the energy industry through multiple acquisitions. In fact, its oil and gas business delivered $18.77 billion to the top line in 2014, or 12.6% of total company revenue.
Building this type of business is all well and good when oil prices are riding high, but that clearly hasn't been the case since July 2014. Share prices of pure-play energy companies have crumbled right along with the price of crude, and the horizon remains blurry for many of these players. However, with this level of uncertainty around oil markets right now, GE appears to present the perfect hedge.
Now, that might appear to run a bit counter to what I said just a few paragraphs above regarding GE buying into oil and gas in a big way. Let me just stop those thoughts right here: I believe GE's pre-existing diversity gives the company the ability to wait out the short-term troubles while further expanding its presence in oil and gas to capitalize on the long-term opportunity.
Drop the crude attitude
With just 12.6% of its revenue directly exposed to oil and gas markets, GE is more than capable of continually investing in the sector while others might be forced to sell assets at bargain prices. Don't believe me? Just ask Chief Financial Officer Jeffrey Bornstein, who was recently quoted as saying GE will "use this as an opportunity," when asked about the company's prospects in a down oil market.
Need proof he's serious? Just one month ago, GE released a report discussing its work toward reducing emissions from and the amount of water used during the fracking process. In it, I discovered Statoil is working with GE on this initiative. Already, they have begun capturing and compressing excess natural gas from oil wells and are exploring the idea of replacing water with liquid CO2 when fracking an oil or gas well. By exercising its capacity to keep spending on research and development, GE is likely to separate itself from peers that lack that ability. The fact that initiatives like this involve partnerships with some of the largest producers in the world is just gravy.
The opportunity to press forward like this is due, in large part, to the continued success of GE's pre-existing divisions. These businesses include its aviation, health care, and power and water divisions. Combined, these three divisions generated $13.4 billion in profit after tax. That's more than five times what the oil and gas group delivered. So, while the oil and gas division has been growing in recent years, it's a far cry from being the only rope holding GE to the dock during a storm. Perhaps this is why GE's shares are only down by 1.5% over the past year, compared to the Energy Select ETF's 13.5% fall.
If you want to invest in oil, gas, or both, General Electric might be a great place to start. It has exposure to the upside when prices begin to rebound, yet its diversity enables the company to invest in the fossil fuel business even when others are forced to shrink operations. This makes GE one of the safest bets on an oil rebound I can find, and it comes with a 3.6% dividend yield, to boot.
Taylor Muckerman has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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