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The 10 Best Oil & Gas Stocks for Long-Term Investors

This guide is based on the thesis that long-term investment outperformance in the energy sector rests on buying and holding shares in companies that have sustainable competitive advantages in their marketspace. The basic investing truisms such as diversification, investing for the long-run, and buying shares at a reasonable valuation continue to apply. This guide looks first at the prospects for the oil and gas industry before building a list of companies with outsized long-term potential.

Oil and gas industry outlook

Falling oil prices

As I write this in December 2014. oil prices have been falling for several months now. While predicting the future of oil prices is nearly as difficult as predicting the future of stock prices, the fall in oil prices seems to have two catalysts that will continue for a while: supply and demand.

Supply: Over the past several years there has been an increase in global oil and natural gas supply due to the United States shale gas and tight oil boom. In addition, OPEC has chosen not to cut production in response to falling prices, which would have slowed their fall. This is likely an attempt to squeeze out American, Canadian, and Russian oil producers, who have higher production costs and thus slimmer profit margins. As prices fall, American, Canadian, and Russian oil producers will become unprofitable before OPEC companies do. Economist Anatole Kaletsky argues that the likely trading range for oil going forward is $20-$50 per barrel. based on the production costs of the low-cost and high-cost producers, respectively.

Demand: The weakening global economyespecially in Europe and Chinahas been leading to a drop in global oil demand. This sharp drop in demand is likely most responsible for the rapid fall in oil prices. The drop in demand is also the greater threat to overall oil industry profits, because it suggests a shrinking market for its product.

An old saw in financial markets says Don’t catch a falling knife. It is inherently dangerous to invest in a market when prices are falling due to deteriorating fundamentals, as is the case with the oil industry today. When faced with falling prices, it is important to distinguish between temporary fear and deteriorating fundamentals. Temporary fear presents buying opportunities; deteriorating fundamentals do not. In the face of declining oil prices, the best option is to develop a short list of stocks to watch, but wait to invest until after supply and demand are no longer pushing oil prices lower.

Headwinds for the big oil supermajors

A natural place to look for sustainable competitive advantages is in the energy industry’s largest companies. The biggest publicly-traded energy companies are the big oil supermajors, consisting of Exxon Mobil. Royal Dutch Shell. BP. Chevron. ConocoPhillips. and Total. They are dwarfed byand face increasing competition fromthe national oil companies (NOCs). This table shows the petroleum reserves of the largest NOCs (white) versus the largest supermajors (yellow):