Capturing Oil Opportunities With Occidental

The stock market is seemingly convinced that another round of monetary stimulus will soon be on its way.  Since the most recent European Central Bank (ECB) meeting on August 2, the stock market as measured by the S&P 500 Index has gained in 9 out of the last 11 trading days.  And the nature of the recent advance is very similar to past monetary stimulus melt up phases.

Whether the U.S. Federal Reserve (the Fed) or the ECB end up delivering more balance sheet expanding monetary stimulus is still subject to debate.  But if they do, stocks are not the only asset class that stands to benefit, as a variety of other categories stand to benefit just as much if not more.  This is particularly true given the fact that stocks have already begun aggressively pricing in more stimulus while many of these alternatives have not.

Oil has ranked among the main beneficiaries from monetary stimulus.  In short, oil prices soar when central banks are applying stimulus and falter when they are not.  And to date, oil prices have vastly underperformed stocks in pricing in more stimulus.  Thus, oil offers a favorable relative investment opportunity at present.

Gaining a direct exposure to Oil can prove challenging, however.  This is due to the fact that the exchange traded products (ETFs and ETNs) designed to track oil prices either do a poor job of tracking underlying oil prices or are synthetic products that subject investors to the credit risk of the underlying issuer.

Fortunately, the stock of Occidental Petroleum (OXY) has demonstrated itself to closely track spot oil prices in recent years.  As a result, it represents a solid alternative to establish exposure to oil prices.  Adding to its appeal is the fact that Occidental also provides a variety of valued added characteristics that justify consideration for a core long term position that may be worth holding through any further market volatility in the months and years ahead.

Selected characteristics are listed below:

  • High Quality – Occidental is among the most financially healthy and best managed firms not only in the energy space but the overall market.
  • Attractive Growth – Occidental is a strong free cash flow generator that has a proven track record of increasing its dividend at a double-digit annualized rate. It has also been consistently expanding production and increasing reserves.
  • Future Opportunity – Occidental has a favorable business mix with operations in the established oil industry as well as attractive growth potential in domestic natural gas through its various shale properties.  Thus, Occidental provides lower risk exposure to what may be among the most attractive growth opportunities in the coming decades.

Portfolio allocations to Occidental were established on August 17 based on the above themes.  As mentioned, while the Occidental position is designed to capture potential near-term upside associated with any potential monetary stimulus program, it may also remain in portfolios as a core long-term holding.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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