Cramer’s 5 Plays on Higher Oil
Brent crude prices pulled back on Monday, after five straight higher settlements, as G20 concerns about the effect of higher oil prices on global growth and a stronger dollar helped counter ongoing fears about tensions with Iran and potential supply disruptions.
“Mad Money” host Jim Cramer, though, expects the price of oil will continue to climb. He viewed Monday’s pullback as an opportunity to finally buy oil stocks, so long as you have an appetite for risk. Here are a few oil names he thinks investors should consider:
ConocoPhillips: For investors who like to play it safe, Cramer recommends ConocoPhillips. He considers Conoco one of the most shareholder friendly companies, as it boasts a 3.5 percent dividend yield. It has also executed meaningful share buybacks, which helped reduce share count.
The Houston-based company is also unlocking value for shareholders by breaking itself up, Cramer continued. Conoco spinning off its downstream refining and marketing business while keeping its faster growing exploration and production business, he said.
Schlumberger: The world’s largest oil service company, Schlumberger is also the biggest beneficiary of the huge increase in oil production lately. After all, exploration and production companies have increased their capital expenditure budgets by 30 percent over the last two years, Cramer said.
Schlumberger fits into every part of the oil service business, but Cramer likes that it gets 80 percent of its sales from outside of the United States. In other words, it has less exposure to the weak natural gas business, unlike some of its competitors. It has a 60 percent market share in the lucrative deepwater drilling services business.
As oil companies continue to ramp up production, Cramer thinks Schlumberger could see earnings growth of 30 percent next year. With the stock currently selling at 14 times next year’s earnings estimates, Cramer thinks SLB is a “steal” at current levels.
EOG Resources: EOG Resources is “one of the most undervalued oil companies on Earth,” Cramer said. It was the top producer in the U.S.’s two largest domestic reserves: the Bakken shale in North Dakota and the Eagle Ford shale in Texas. Cramer thinks EOG’s Eagle Ford properties are worth more than the price of the whole company.
Not only is EOG one of the largest oil and natural gas companies in the U.S., it also has proven reserves in the Canada, China, Trinidad and the U.K.
National Oilwell Varco: For investors who can stomach risk, Cramer points to National Oilwell Varco. The Houston-based company is the leading maker of oil rigs, as well as associated drilling and production equipment. It enjoys a 70 percent market share in this area.
What makes this stock risky is that rigs are expensive, long-term investments, so the company needs oil prices to stay elevated for longer periods of time to see the demand tick up. The longer oil drillers think oil prices will stay elevated, the more likely they are to buy oil rigs from National Oilwell Varco.
Magnum Hunter Resources: Headquartered in Houston, Magnum Hunter Resources is an oil and gas drilling and exploration company. The company is currently split between 51 percent oil and 49 percent gas, but is focusing more and more on the oil business. In an interview with Cramer, CEO Gary Evans said his company is drastically increasing output and basically transforming itself into a “drilling factory.” In its most recent quarter, the company delivered a 455 increase in production. It was also able to increase reserves by 44 percent in just sixth months’ time.
Cramer thinks this is a very risky stock, though, because small players like this can get hit with funding problems. So he can only recommend it on a speculative basis.