Energy Stocks with Room to Run

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Refining Profit Margins Have been Hurt

The stock prices of Marathon Oil (MRO), Exxon Mobil (XOM), and ConocoPhillips (COP) haven't appreciated as much some of their smaller rivals because of their large refining and marketing businesses. Refining profit margins have suffered as oil prices have risen, says Hoes. Meanwhile, Hess (HES), Occidental Petroleum (OXY), and Brazil's Petrobras (PZE) have benefited more, as investors have recognized their production growth capabilities with new oil discoveries.

A pullback in oil prices would cause a bounce in independent refining stocks such as Valero, Frontier, and Tesoro (TSO) because it would take some pressure off refining margins and help gasoline prices ease, encouraging more road travel by American families, Hoes says.

Rice believes integrated oil stocks could move 30% to 40% higher over the next year or so, while North American land drillers such as Nabors Industries (NBR) and Patterson-UTI Energy (PTEN), which provide rigs that drill mostly for natural gas, could climb another 20% to 30%.

Schlumberger Has Room to Run

Oilfield service stocks are generally strong bets, since their revenues will continue to rise as producers put additional rigs to work in an anxious attempt to replace rapidly depleting reserves, says Rice. He thinks Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI), Weatherford International (WFT), and Smith International (SII) are best poised to benefit from that trend, but he considers them names to hold, not necessarily to buy, at current valuations.

FBR's Mackenzie thinks that Schlumberger has much more room to run. "Supply is not going to end this cycle any time soon," he says. "There's not enough incremental supply coming in over the next two years to soften up [oil prices]."

Even greater opportunities may lie elsewhere in the broader energy sector, as the legislative focus on curbing the effects of global warming sharpens over the next few years.

Climate Security Act Would Change the Game

The prospects for stronger natural gas demand—and hence prices—look positive, especially if the game-changing Climate Security Act gets passed into law. The bill, sponsored by Senator Joseph Lieberman (D-Conn.) and Senator John Warner (D-Va.), has scant chance of even getting voted on June 2, if Republicans fail to show up to provide the required quorum of 60 Senate members. But it would stand a better chance of passing sometime next year under a Democratic President and Congress, says Hoes,

Besides helping to subsidize energy costs for those who can't afford them, the bill would establish a carbon cap-and-trade system that is expected to drive up coal prices by forcing coal-burning electric utilities and coal producers to cover the costs of reducing greenhouse gas emissions.

A spike in coal prices would spur electric utilities to turn to natural gas as an "interim solution," which would benefit not only oil and gas producers but those oilfield service companies that support them, particularly land drillers, says Hoes.