Is it Time to Invest in Oil?

As expected with the coming of the summer months, oil prices have surged over the last couple of weeks from $40 to $60. Fueled by a slew of recent economic data which points to an easing of the recession, investors have been snapping up oil stocks as well as increasing their trade positions in the commodities market. Upward pressure from economic data, which suggest future supply, will be cut at an even more rapid pace than demand is dropping and political turmoil in the Nigeria’s oil rich south will help to lengthen black gold’s recent success.

For the first time in 10 weeks, the EIA reported that crude inventories are finally falling. This is a trend, which many expect to likely continue at least through the summer months as consumers ramp up their traveling plans for vacations. This leaves investors to wonder, Which companies stand to benefit from rising oil prices?

One of the safest ways to play this market is to own at least one of the majors. ExxonMobil (XOM) with a market cap of $344.0 B leads the way in this industry. As the largest integrated oil and gas company by market cap, ExxonMobil (XOM) participates in the exploration, production, manufacturing, distribution, and sale of oil and gas products. Looking at their balance sheet, Exxon ended the most recent quarter with approximately $25 billion in cash and short-term investments, which will put them in prime position to take advantages of projects that will become more attractive as oil prices rebound. Over the last four weeks, the stock’s price has appreciated approximately 8 percent.

Outside of the U.S. another major with the total package is France’s largest company by market cap, Total (TOT). In spite of the massive downtown in the oil and gas industry, Total experienced the narrowest decline in replacement cost profit of all major oil companies. Analysts view replacement cost profit as a primary means of evaluating oil company’s performances. In addition, the company trades at a lower forward P/E (8.68) while offering a very attractive forward dividend yield of 5.00 percent. With a 22.2 percent gain over the last 4 weeks and EPS of 1.23 for the 1st quarter, Total may make a very attractive addition to your portfolio.

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If you would rather take a look into a more out of favor sector, the oil services sector has experienced some pretty decent declines. As the effects of the recession begin to wear off, large oilfield services companies such as Baker Hughes (BHI) may present attractive buying opportunities. Baker Hughes (BHI) provides the products and services necessary for oil companies to produce and explore different sites. The company stands to gain as companies begin to rethink their capital expenditures for the rest of 2008. This may be more of a play on oil prices in general. As prices go up, investment and exploration goes up. With a P/E ratio of 7.92 and a solid balance sheet, Baker Hughes (BHI) seems relatively cheap compared to some of its larger peers.

A stock options income generating strategy for these companies may be in order. So even if the stock price of these companies is stagnant, investors can potentially generate favorable returns. A covered call example position for XOM is currently available for July stock options expiration with a potential return of 3.8% – and the time frame for this potential return is only 53 days. Also, covered call investing positions for TOT and BHI are available for July stock options expiration with potential returns of 4.6%. Each of these positions has downside protection of at least 4%, so as long as one of these covered call investing positions does not decrease more than 4%, the positions will remain profitable.

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[tags] oil, economic data, supply, Nigeria, EIA, exploration, production, manufacturing, distribution, gas, France, oil services, BHI, Baker Hughes Inc., TOT, Total SA ADR, XOM, Exxon Mobil Corp. [/tags]