The alternative strategy, one that ExxonMobil's purchase of XTO Energy exemplifies, is to acquire your way to new reserves. And this strategy doesn't come cheap, either. It cost ExxonMobil to $41 billon in stock to acquire XTO Energy in 2010.
Think about the investing logic of this situation for a moment. Where does it tell you to put your money?
5 energy stocks to consider
If the oil companies that are following the Chevron strategy by spending on exploration are adding big bucks to their capital spending budgets, you'd want to invest in the companies that are the beneficiaries of that money.
If the oil companies that are following the ExxonMobil strategy of spending to acquire reserves are willing to pay big bucks for smaller companies with promising reserves or exploration prospects, you'd want to invest in the companies they might acquire.
In the first group, I'd look to own companies such as global oil-service and exploration leaders Schlumberger (SLB, news) and Weatherford International (WFT, news). My third pick would be FMC Technologies (FTI, news), a producer of deep-sea production and processing equipment. The company reminds me of the well-support team at John Wood Group that General Electric (GE, news) just bought at 17 times EBITDA (earnings before interest, taxes, depreciation and amortization). That's way above the 6.6 multiple for two deals in the sector in the last two years, Bloomberg calculates, so either GE overpaid or prices for deals in the sector are rising fast. How about a vote for both?
In the second group, I'd look to plays in the mode of XTO Energy. XTO not only had a lot of reserves, but it also also sat in the safe and friendly United States.
I wouldn't just play a guessing game and hope that I hit on the next buyout stock, though. Instead, I'd make sure that I was looking at companies that can themselves increase production aggressively in the next few years. That way, even if they aren't bought, you'll profit from organic growth. One of my top two is Oasis Petroleum (OAS, news), which has 39.8 million barrels of proven reserves and lots and lots of undeveloped acres under lease in the very promising Bakken oil shale formation. Proven reserves popped from just 13.3 million barrels at the end of 2009.
My other producer pick is EOG Resources (EOG, news). Think of this company as a bigger Oasis with more exposure to natural gas. The company has sizable unconventional oil reserves and has been able to ride out the natural gas plunge by shifting production toward oil (67% of production by the end of 2011, the company projects) from natural gas (77% of production in 2007).
That's five energy stocks for the end of the early recovery stage and the beginning of the late recovery stage. Now if the economy will only cooperate by accelerating and not slowing down.
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Oasis Petroleum, Schlumberger and Weatherford International as of the end of December. Find a full list of the stocks in the fund as of the end of December here. The January portfolio holdings will be posted later this week.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
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