Considering the crude dynamics -- ample supplies in the face of weak demand -- investors do not see an immediate rebound in the sentiment and expect more punishing times ahead.

Look at Integrated Oil Majors Instead

In this current turbulent market environment, we advocate the relatively low-risk energy conglomerate business structures of the large-cap integrateds, with their fortress-like balance sheets, ample free cash flows even in a low oil price environment and growing dividends.

Thanks to their integrated structures, companies like Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Royal Dutch Shell plc (RDS.A), TOTAL S.A. (TOT) are able to withstand plunging oil prices and still protect their top and bottom lines on downstream strength. With the refining unit of these conglomerates being buyers of crude – whose price is in a freefall – their profitability improves due to a fall in the input cost.

The companies’ financial flexibility and strong balance sheet are real assets in this highly-uncertain period for the economy. Most of them remain in excellent financial health, with ample cash on hand and investment-grade credit ratings with a manageable debt-to-capitalization ratio. On top of this, managements have established quite a track record of conservative capital management and cash returns to shareholders. They also pay a growing and safe dividend, yielding attractive returns.

Plunging Crude Prices Good for Downstream Players

The prevailing weak crude pricing environment has been a blessing for the downstream energy firms. This is because they need to pay less for crude – bought from the exploration and production (E&P) companies – for producing end products like gasoline or petrol and jet fuel or aviation turbine fuel. These products are then sold from retail outlets and fueling stations in the U.S.

Pure downstream companies like Tesoro Corp. (TSO), Murphy USA Inc. (MUSA), Valero Energy Corp. (VLO) and Western Refining Inc. (WNR) – with their refineries and retail fueling stations – were the biggest winners as their earnings are negatively correlated to oil prices.

MLPs to Withstand the Carnage

A safer way of playing the sector would be to utilize Master Limited Partnerships (MLPs), which offer considerable returns at significantly lower risk.

Most MLPs are involved in processing and transportation of energy commodities such as natural gas, crude oil, and refined products, under long-term contracts.  As such they have relatively consistent and predictable cash flows, E&P companies, whose profits are highly correlated with commodity prices.

Given the current weaknesses in petroleum stocks, MLPs are probably the best method of investing in the sector. They also offer liquidity and tax benefits which add to their appeal. This is why these stocks would make good additions to your portfolio.

We suggest Spectra Energy Partners L.P. (SEP), Atlas Pipeline Partners L.P. (APL) and Magellan Midstream Partners L.P. (MMP).

Check out our latest Oil & Gas Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy.
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EXXON MOBIL CRP (XOM): Free Stock Analysis Report
 
WESTERN REFING (WNR): Free Stock Analysis Report
 
VALERO ENERGY (VLO): Free Stock Analysis Report
 
TESORO CORP (TSO): Free Stock Analysis Report
 
TOTAL FINA SA (TOT): Free Stock Analysis Report
 
SPECTRA EGY PTR (SEP): Free Stock Analysis Report
 
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report
 
MURPHY USA INC (MUSA): Free Stock Analysis Report
 
MAGELLAN MDSTRM (MMP): Free Stock Analysis Report
 
CHEVRON CORP (CVX): Free Stock Analysis Report
 
ATLAS PIPLN PTR (APL): Free Stock Analysis Report
 
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