While no environmentally inclined, liberty-loving American wants oil prices to skyrocket, we have to face facts and temper optimism with realism. If Iran closes the Straits of Hormuz, oil prices could jump sharply higher while easy money pressures the dollar against hard assets. Hedging against that risk doesn’t mean you should store gas in barrels in your yard or storage shed, locking in today’s relatively low prices. It means investors may want to increase their allocation to cheap oil and gas majors via bull calendar spreads or covered call option positions. Here are five rock solid oil companies to own over the long haul:
ConocoPhillips (COP) — ConocoPhillips has gone nowhere over the past six months, but high oil and gas prices should help the company’s growth rate over the next year. Conflicts with Iran, uncertainty over global oil and gas reserves, money printing by central banks, and overall poor resource management practices unfortunately benefit big oil prices. At 9X earnings and 8.5X forward earnings, ConocoPhillips looks cheap enough for the long term investor to buy and hold onto for years at a time. While the shale oil plays are enticing, the established oil majors are pretty cheap here. Reserve replacement is the biggest issue with these names, but we think new discoveries will be likely replenish reserves in time.
Statoil (STO) — Just because many Norwegian offshore oilfields are drying up, that does not mean Statoil Hydro is a broken company. Rather, it’s simply a broken stock, in my view. Statoil suffers from eurozone contagion more than future cash flow stream troubles. At 7.3x earnings and an EV/EBITDA of around 2.2X, Statoil’s investments across the globe should pay off for current shareholders in time. A 4% or so dividend never hurts, and risk averse investors should consider selling front month, at the money call options against their positions to collect income. People like to knock covered calls, but the numbers speak for themselves: Look at the performance of the CBOE buywrite S&P 500 (PBP) index versus owning the S&P completely unhedged over time and you see that returns are much better than the S&P when the market is flat or down.