We need an updated strategy if we’re staying in the oil game. Not a new one, mind you – the plan I’ve laid out for the long-term trends in oil is, I think, going to be the absolute right one – but an adjustment for the trader in our midst is necessary.
I’ve been clear about what I believe is the most prudent way to invest in the sector – banking on a very slow rebound in oil prices can make for some conservative picks in energy companies that I believe are going to rebound best from the ‘shale bust’ . You’ve heard me talk often about EOG Resources (EOG), Cimarex (XEC) and Anadarko (APC), three names that are nearing value numbers again, by the way, on the back of the David Einhorn short recommendation.
But there have also been others that I’ve mentioned; other shorter-term strategies that could be employed, to find quick trades that don’t need to be held forever. These include some of the dedicated shale players with less than stellar balance sheets and some sub-sector oil plays that are often left off the radar screen. Let’s look at some of these now.
For a shorter-term play on shale players, you’d want to find those with good assets but fairly distressed debt positions, making their future rocky – but with enough cash to make their possible demise less clear. These three qualities allow the speculator to mark time as the crude markets play themselves out.
With every small rally in crude, the optimism of the “end” of the bust cycle allows these ‘less than stellar’ oil companies to rally when other smaller, more cash poor players will not. Examples of these types of stocks are Oasis Petroleum (OAS) and Northern Oil and Gas (NOG). These two have shown the capacity to rally strongly as crude has found a level above $55 in a way that even the strongest E+P’s previously mentioned have not. I have talked about, and traded, Oasis before and the shares have worked out well as a trading device between crude levels.
One other place to go is outside the shale players but in the most distressed of oil production sectors – offshore. Again, this is an idea I’ve mentioned before but is turning out to be a great trading vehicle as well, as oil bounces around between $50 and $60. The reason for this is the inevitable health of the deep-water sub-sector: While we can talk about the consolidation and survivors of shale, and choose who might or might not make it through, we do know that at some point the world will have to return to offshore drilling prospects.
In this, there are but a handful of companies capable of these specialized operations, and unless bankruptcy is a real risk, the drop in the drilling cycle, and even the capital losses, are only temporary setbacks. Put that together with almost single digit stock prices and you have a very volatile trading vehicle that is far more likely to go up than go down with every move higher in crude.
Two good examples of this would be Transocean (RIG) and Seadrill (SDRL). Seadrill continues to be a core long-term holding of mine but is still useful for short-term trading shares as well. Despite the likelihood of the deep-water cycle showing no sign of improving until mid-2016 at the earliest, Seadrill shares have shown an equally good ability to respond with fast, juicy gains corresponding to moderate increases in oil’s price.
I tend to want to advise investors for the long-term, but I know there are lots of shorter-term traders out there looking for places to play. If you’re that type of trader, here are two of the best right now.