What a difference a few months can make. Crude oil, after bottoming out at $27 in early 2016, has rallied back mightily and now trades in the mid-$40s. While this is obviously a long way from its 2014 highs of around $100 per barrel, the industry and its investors have no doubt breathed a collective sigh of relief. Dare we say a rebound may be in the offing?
While a true rebound in oil prices may or may not occur, quality names that operate within the sector are now trading at fire-sale prices. For investors, there is no time like the present to take advantage of this.
Which is exactly why we asked some of The Motley Fool's contributors to put their heads together and come up with three energy stocks to buy in the month of May. Read on to learn more about some of the best buys in the oil industry today.
Sure, General Electric (NYSE:GE) is way, way more than just an energy company, but one of the reasons that it looks like a pretty compelling investment just happens to be its businesses that serve the energy industry.
GE is one of the very, very few companies that can give you exposure to all different kinds of energy. It has a large business supplying equipment and parts to the oil and gas business, but at the same time, it is one of the larger manufacturers of turbines used in both hydroelectric dams and wind farms. Despite the company's oil and gas and power sectors feeling the pressure of low oil prices, GE's energy businesses made up 45% of all revenue and 27% of all industrial profits. Also, its two fastest-growing segments -- renewables and energy connections -- are part of its broader energy portfolio.
As the company exorcises the demons of its GE Capital business, GE's energy business has the potential to be a real (here comes the pun) powerhouse for generating earnings. Add in the company's push to make its equipment more interconnected with its Predix software platform, and things are definitely looking up for General Electric. Once GE sheds its GE Capital shackles, the company will likely look like a compelling investment, and buying into General Electric today will allow investors to capture the benefits of these two catalysts.
If oil-field service company Core Labs' (NYSE:CLB) management team is to be believed, its results are just about to turn the corner. That's because the company "continues to anticipate a 'V-shaped' worldwide commodity recovery in 2016, with upticks expected to start in the third quarter." Given that outlook, Core Labs believes that its "second quarter 2016 results should mark the bottom." In other words, it only expects to report one more soft quarter before its revenue and earnings take a sharp upward turn.
That view is based on the fact that oil demand growth remains strong, while the supply picture is expected to weaken considerably in the second half of the year. To put numbers behind it, the International Energy Agency is projecting that crude demand will grow by an average of 1.2 million barrels per day this year. However, according to Core, supplies in the U.S. alone are expected to fall by an average of 900,000 barrels per day by the end of this year. That should lead to a much tighter oil market in the second half of the year, likely boosting crude prices and spurring oil companies to increase drilling activities, which would drive better operating conditions for Core Labs.
With that turn seemingly just around the corner, May looks like a great time to buy oil stocks. And while there are plenty to choose from, Core stands apart because it is by far the most profitable oil-field service stock, converting a sector-leading 28% of every dollar of revenue into free cash flow. It's that compelling combination of a near-term catalyst and robust cash flow that makes Core Labs an oil stock to consider buying in May.
In every bear market, whether it is sector-specific or economywide, strong players are inevitably dragged down with the sell-off. Such is the case with Kinder Morgan (NYSE:KMI) today. In KMI, investors have a fantastic business franchise, one that acts as a toll collector for oil and gas producers looking to move their products across North America. This fact alone warrants your attention; mix in that it is still controlled and stewarded by founder and current executive chairman Richard Kinder, who happens to own some 11% of the company to this day, and you've got the makings of a great investment.
None of this is to say that Kinder Morgan has managed to remain completely untarnished over the last 18 months. True, it hasn't found itself in Chapter 11 bankruptcy as so many other energy companies have, but it has been forced to cut its coveted dividend in order to fund its expansion plans. Current travails, though, should prove transitory. Those same energy infrastructure plans will pay ever greater dividends, hopefully, in the coming years, and a great deal of the current malaise surrounding the shares will likely be a memory.
Shares currently trade for $17, well off their summer 2014 highs of $40. Its dividend, currently at 12.5 cents per quarter, equates to a current yield of just under 3%. Not great, but more than respectable given that one can likely look forward to a reinstatement of Kinder Morgan's $0.50-per-share quarterly payment in the next few years. This almost certainly will happen, unless it is deemed more prudent by management to repurchase shares or expand the company's already massive asset base via expansion or acquisition, as noted by Mr. Kinder in the company's latest quarterly conference call.
As the old saying goes, there's no time like the present, which is why I advocate picking up a few shares of energy infrastructure behemoth Kinder Morgan in May.
Matt DiLallo owns shares of Core Laboratories and Kinder Morgan. Matt DiLallo has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. Sean O'Reilly has no position in any stocks mentioned. Tyler Crowe owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Core Laboratories and Kinder Morgan. The Motley Fool owns shares of General Electric Company and has the following options: short June 2016 $12 puts on Kinder Morgan. 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.