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3 Oil Stocks That Might Be Profit Gushers

Investors should be closely watching Big Oil right now and considering staking out a long-term position.

While short-term economic headwinds might be holding back crude oil a bit, baseline demand is strong, and it’s undeniable that geopolitical unrest risks a shock to the energy markets. Many oil stocks provide reliable dividends as a hedge in the short-term, and they offer the ability to play a secular recovery in 2013 or 2014 if and when America turns around in the next year or two.

My favorite three oil stocks include Chevron (NYSE:CVX), Transocean (NYSE:RIG) and Kinder Morgan Inc. (NYSE:KMI). We’ll cover them in a moment, but here’s why I like the sector generally:

  • Mideast Mess: Whether you believe war with Iran is inevitable or whether you are convinced the nation will implode under a collapsing currency and popular unrest, either scenario doesn’t bode well for the Middle East and oil production there. Turkey is fighting with Syria elsewhere (Israel is fighting with Syria, too), and Libya still is a god-awful mess after the embassy attack. This is not a recipe for stable oil production.
  • Inflationary Fears: I’m not going to unravel the entire QE3 ball of yarn here, just make a simple point: The Federal Reserve has admitted it is not concerned with inflation and is focused on maximum employment with its monetary policies. Then there are our yawning federal deficits and the overall “creditworthyness” of America that could weaken the greenback. The U.S. dollar has retained strength and remained a safe-haven currency, but for many reasons (Slow moves toward stability in Europe? Fiscal cliff?) we could see our currency fall out of favor — and drive up dollar-priced commodities like oil as a result.
  • Long-Term Recovery Play: If you have an investment that will hang tough in the near-term but also participate in a secular recovery, that’s a great place to be right now, because I remain convinced that 18 to 24 months from now, the economy will be on much stronger footing. Energy stocks seem to be reasonably insulated in the near-term thanks to the prospects of a “risk premium” in oil and the inflation that should keep oil prices high, but they also will be in a good place once the recovery takes hold down the road.

Now let’s run through these three stocks in particular:

Chevron

If you’re going to get into oil stocks, you need to have one of the megacaps — and I like Chevron. As I noted in a recent post about how Big Oil is more efficient than tech stocks, Chevron has a simply remarkable revenue-per-employee figure of $3.84 million.

Yes, Exxon Mobil (NYSE:XOM) is a cut above with a staggering $5.27 million per employee. Yes, Exxon’s market cap is almost double at $425 billion to $230 billion. But while the gap between them might sound large, it’s much smaller than the gap between the pair and all the bit players below them. Besides, XOM’s dividend is less than 2.5%. Chevron’s is more than 3%. Chevron also is up almost 10% year-to-date, while Exxon stock is up less than 8%. And by the way, Chevron is sitting on a mammoth cash hoard of $21.5 billion — prompting talk of a buyout in the near future.

Transocean

Transocean doesn’t pay a dividend right now, thanks in part to the hangover litigation and costs from some of the BP (NYSE:BP) oil rig mess in the Gulf of Mexico back in 2010. But I like the positioning of this stock for a long-term play because as oil gets more expensive, it becomes more cost-effective to tap into deepwater oil fields — meaning business will pick up for RIG as oil prices do. And longer-term, the bottom line is there is only so much onshore oil, and it’s going to take companies like offshore oil giant Transocean to keep up with global demand in the years ahead. The company has the scale to tap into this trend mightily over the next few years.

On a value basis, RIG has a forward P/E of just 10.1 based on fiscal 2013 earnings and an attractive PEG ratio of 0.86. On the fundamental side, Transocean is a hard read thanks to big 2011 losses due to the BP spill, but RIG is projecting more than 50% earnings growth from fiscal 2012 to 2013 as both the top and bottom lines move up nicely.

Kinder Morgan

It’s hard to keep your Kinder Morgans straight without a scorecard, so I’ll refer to this one by its ticker KMI to prevent confusion with the partnership or the management firm of the same name.

I like KMI stock because it is the parent of the group, operating through its subsidiaries a vast network of energy storage and transportation businesses. The dividend is a nice 3.9%, the business is remarkably stable thanks to the scale and baseline demand of energy, and it has one of the shrewdest energy magnates at the helm in Richard Kinder. The forward P/E is a bit rich at 27.4 right now, but the nice dividend and improving revenue and profits are encouraging.

So those are my picks. Which oil stocks are you watching?

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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