Cramer's 2 Favorite Oil and Gas Stocks

This quarter’s oil and gas sector earnings reports have been pretty ugly. Cramer will be the first to admit that. But with crude and natural gas finally trading in a somewhat predictable range, and the stocks related to both commodities down a good amount, he said investors should add at least one company from the group to their portfolio.

The question, though, is who to pick. The way Cramer sees it, the bigger the firm, and the dividend paid, the better the investment. These stocks trade with oil and gas prices before their fundamentals, so there’s some inherent volatility here. Better to go with a large, integrated company that deals in all aspects of the business: refining, exploration, production and marketing. They’ll offer much more stability than a firm that focuses on just one. And the dividend will add even more protection against price fluctuations, and the overall chaos in the markets.

Cramer’s two favorites right now are BP and ConocoPhillips, which pay out 7.8% and 4%, respectively. There are reasons for liking Marathon Oil and Chevron, too, but he recommended waiting until oil gets to the low $30s again. And with Exxon Mobil most likely reporting another disappointing quarter Friday, the whole sector could see declines, giving investors a better entry point.

Why ConocoPhillips? This is the number-one natural gas producer in the U.S., a good place to be when prices turn up. But Conoco’s number two in refining and three in oil here in the States, so there’s enough diversification to offset those declines in nat gas. The refining work, especially, has been a big help to COP, giving a bit of a boost to fourth-quarter earnings. Even though this is Cramer’s top pick for the sector, it’s still trading at a 30% discount to Exxon and Chevron, something the Mad Money host just doesn’t understand. The stock closed Thursday at $47.16, down 50% from its $95 high. So we can probably assume that any bad news is already baked into the price. Cramer likes COP under $50, making now the right time to buy.

As for BP, the 7.8% dividend yield is almost reason enough to own the stock, especially because management stands behind the payout and cash flows are sufficient to support it. But beyond that, this diversified business continues to get stronger as acquisitions and improved execution turn the once struggling BP around. The company bought assets from Chesapeake Energy to increase its natural gas exposure and benefit from the growth in America’s booming shales, like Fayetteville and Woodford. And cost reductions combined with production growth – Cramer expects 6% when the company reports Feb. 3 – should close the gap between BP and its peers Shell and Total . That is, as long as management keeps up its good performance, and that juicy dividend yield.

Cramer’s charitable trust owns BP and ConocoPhillips.

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