With oil prices fresh off their strongest start to a calendar year since 2014, CNBC’s Jim Cramer wanted to help investors pinpoint some of the energy sector’s most lucrative areas.
“How do you play this fantastic run in oil, with the price of crude flying through $60 a barrel thanks to OPEC production cuts and increased demand from an accelerating global economy?” the “Mad Money” host said.
There was a time investors could pick almost any oil play and profit. But amid a glut of natural gas, Cramer said oil and gas companies with natural gas exposure become riskier investments.
Pure natural gas picks with holdings in the Pennsylvanian Marcellus shale or the Ohioan Utica shale like EQT or Chesapeake Energy, respectively, are even riskier, Cramer said.
“If the weather stays like this for a couple more days and the natural gas stocks still don’t participate and natural gas doesn’t fly through the roof, I say trim, trim, trim,” he advised. “The surfeit may be so large that even this cold snap isn’t enough to move the needle.”
For drilling and service companies like Halliburton, the risk is not so much a glut as it is the potential effects of technological advances on the sector, Cramer said.
The “Mad Money” host questioned how much service will be needed given the improvements to drilling tech, even in notoriously oil-flush Permian Basin in Texas and New Mexico.
Normally, Cramer would expect a bump in Baker Hughes’ stock, but the rig-counting oilfield service company’s ties to the bedraggled General Electric are likely stifling buyers, he said.
“[Baker Hughes] might be the first thing GE sells in order to shore up its balance sheet,” Cramer said. “It will most likely be the subject of a fire sale. I think it should be broken up and sold to pieces, but it doesn’t matter. I say no, thank you.”
Investors should be particularly selective when it comes to the energy giants, most of which no longer trade together, Cramer advised.
Cramer said he would be a buyer of Schlumberger, the world’s biggest oilfield service company, and noted that Chevron has been anointed a growth stock by Wall Street and BP has been dubbed a safe stock. Above all, Cramer asked investors not to go “ETF hunting.”
“It’s not worth buying the bad with the good” in the energy sector, he said.
Independent energy plays were more straightforward. Cramer said any companies with exposure to Permian oil growth like Cimarex, Diamondback Energy or Concho would work.
But when it comes to the best of the best with crude topping $60 a barrel, Cramer suggested the pipeline stocks for three reasons.
“The group is well below where it was trading when oil was last at these prices,” he said. “The pipeline companies are no longer struggling with the U.S. government; [the Federal Energy Regulatory Commission] greenlights pretty much anything. The independents are desperate for new pipe to take natural gas out of Marcellus and Utica to the South and the Northeast, and to take oil and gas out of the Permian for export.”
The “Mad Money” host was sanguine on most of the pipeline plays, particularly those tied to well-run companies like Magellan Midstream Partners or Enterprise Product Partners.
The one thing Cramer didn’t want homegamers to overthink was the effect of the new tax law on their energy investments, because the group trades more on asset growth than on tax-adjusted earnings.
“There you have it, your game plan for this suddenly revitalized sector, brought back to life by $60 oil, a welcome level for the entire group,” the “Mad Money” host said. “Just remember, a rising tide is no reason to stop being selective. Stick with Schlumberger, Chevron, BP, the independents with Permian exposure — Cimarex, Diamondback, Concho — and the best run pipelines: Magellan Midstream and Enterprise Product Partners.”