As a followup to Sunday's post regarding the future of oil prices, today I will visit what I believe to be the top 5 oil stocks. The criteria for choosing these stocks are as follows: potential growth, attractive valuation, and a healthy balance sheet. These names are all primarily engaged in oil operations, rather than natural 
gas or other energy sector businesses.
1. ConocoPhillips (NYSE:COP)- There simply isn't much negative to say about this company. They pay a dividend yield of 2.01%, have a very healthy balance sheet, and Warren Buffett is a major holder. The company is more leveraged to the price oil than some of its peers, which I think is a huge positive given the demand for oil worldwide.
2. Transocean Inc. (NYSE:RIG)- Transocean provides offshore drilling services for oil and gas wells. This sector has tremendous pricing power, and Transocean has proven to be the industry leader in this area. The company is projected to grow at over 42% a year for the next five years, and currently trades at a PEG ratio of just 0.32.
3. Schlumberger Limited (NYSE:SLB)- The leader in the oilfield services and technology solutions industry has proven to be a great investment. SLB is a huge company, with a market cap of over 100 Billion, but it continues to grow at around 20% a year. The company has terrific efficiency ratios and profitability margins which should continue to lead the industry.
4. Diamond Offshore Drilling (NYSE:DO)- This company operates as a major oil drilling contractor around the world. The company has accelerating earnings and terrific profit margins. The PEG ratio of the stock is just 0.56.
5. Occidental Petroleum Corporation (NYSE:OXY)- This large independent oil and gas producer generates revenue mainly through its oil operations. The company has a strong balance sheet, with lots of cash and little debt. The stock yields 1.7% and has a history of raising their dividend yield often.
These five oil companies are in a good position to take advantage of the demand for oil worldwide, which appears to be constantly growing. These stocks will likely be volatile ones, as the price of oil may have sharp drops and large gains in short periods of time. The long-term trend I believe continues to be higher on these stocks.
As long as demand continues to outpace supply, which appears to be the case for at least the next few years, these stocks look like great investments. The stocks have appreciated quite well already, but have still not appreciated as much as the growth of their net incomes. Use this list as a guide to help you when doing your own research on oil stocks that you could add to your individual portfolio.
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It is interesting that 3 out of th 5 companies that you have chosen are service companies as opposed to explorers and producers. Depending on where in the world you are in, I think that will be a squeeze on service companies as e&p companies try to contain costs that have escalated substantially in the past 2 years. These service companies have "taken" advantage of high oil prices and demands to poke as many holes as possible and the e&p's are starting to fight back. That being said, I suspect to see some real pressure on service companies, but as we try to buy low and sell high, that may create some opportunities.
Posted by: The Dividend Guy | September 10, 2007 4:59 PM | Permalink to Comment