ConocoPhillips (COP) stock, along with shares of other U.S. oil producers like Continental Resources, Inc. (CLR) and Sanchez Energy Corp (SN), are three top stocks to buy today if oil magnate T. Boone Pickens’ theory holds true. The legendary billionaire thinks oil prices are within a few months of a bottom, and expects U.S. oil companies to cut back on supply in coming months, driving prices higher.
While that cut to supply may hurt them in the short-term, it should be very favorable for U.S. producers come the first quarter of 2015.
Pickens told CNBC that domestic oil producers have “overdrilled” in the U.S., and that as a glut of supply continues to flood the markets, American drillers will reduce production, sending oil prices higher. He also emphasized that November and December are historically bullish months for oil prices, saying:
“I can see this lasting through year end. But in the first quarter of next year I think we hit the low and then I expect prices to recover.”
While he didn’t specifically cite the following stocks as potential outperformers, COP, CLR, and SN should be some of the top stocks to buy today if Pickens’ oil price predictions hold true. Consider their merits:
ConocoPhillips (COP): The Safer Play
A household name, ConocoPhillips isn’t some speculative wildcatter you’ve never heard of, and it deserves some love from your portfolio. COP stock offers exposure to both domestic and international markets with exposure to areas as diverse as Australia, China, Qatar, Libya and Russia. From crude oil to liquefied natural gas production, the company does it all.
COP stock is the most conservative of these three oil companies, boasting a market capitalization of $85 billion and a whopping 4.2% dividend. While the energy sector as a whole is down more than 14% in 2014, COP stock has lost a meager 1% year-to-date. It pays you a tidy sum to wait around on its stock, which traded more than 20% above current levels when oil prices peaked around $103 per barrel back in June.
Continental Resources (CLR), Sanchez Energy (SN): Risky Pure Plays
If you lump Continental Resources and Sanchez Energy together, you’d get a company less than a quarter the size of ConocoPhillips. Unlike COP, CLR stock and SN stock are also both “pure plays” on domestic oil production, meaning they don’t drill anywhere other than the U.S.
CLR is one of the biggest producers in the Bakken shale, one of the premier formations in the United States. Even after a precipitous 35% drop from 52-week highs, CLR stock has nearly tripled in the last five years on the heels of the domestic oil and natural gas boom.
SN stock, at only 5% the market cap of CLR, is an even more volatile investment. Sanchez Energy is down about 60% from the June crude oil peak. Since SN stock doesn’t pay a dividend, is relatively undiversified and has a 1.4 debt/equity ratio, when Sanchez moves, it moves big. If T. Boone Pickens is correct about an impending rally in oil prices, SN stock is definitely a buy considering its depressed levels.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.
