Sunday, December 21, 2014

Oil stocks: Barron's picks

Royal Dutch and Chevron have fortress-like balance sheets, high yields, and resilience to swings in the price of oil. Occidental has a 3.8% yield and is buying back 10% of its stock. EOG is self-funding and its break-even price is less than $60 a barrel, among the lowest in the industry. And Schlumberger, the gold standard in the oil-services industry, could gain market share when oil prices revive.

THE FIRST PLACE to look when oil prices fall is often the super majors, large integrated oil companies that tend to fall less dramatically than smaller producers. Each of these companies -- ExxonMobil, Royal Dutch, BP (BP), ConocoPhillips (COP), Chevron, and Total (TOT) -- has made dividends a priority, and is unlikely to cut them during the turmoil ahead. But two, Royal Dutch and Chevron, offer better value than others.

Investors have seldom gone wrong buying ExxonMobil on the dip, but the shares, down just 10% since June, haven’t fallen as far as competitors. Its purchase in 2010 of gas explorer XTO made its production more heavily weighted to natural gas, which could remain depressed longer than oil. We also took a pass on ConocoPhillips, which spun off its refining and chemicals operations in 2012, making it slightly more vulnerable to the pullback. And while BP looks inexpensive -- and sports a 6% dividend yield -- it carries more debt than competitors. A legal decision related to its 2010 Gulf spill could result in fines as high as $18 billion. Total also carries a higher percentage of debt than its rivals.

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