With the oil price rising recently, I’ve been looking for the best related stocks to buy right now for my portfolio. Buying oil stocks can be a great way to gain exposure to the commodity, but this strategy doesn’t come without risks.
Oil and gas stocks can be highly volatile. As they tend to have fixed production costs, they’re leveraged plays on the commodity.
According to Tullow Oil‘s (LSE: TLW) full-year 2018 results presentation, a $5 move in the price of oil either way would have detracted or added $125m from free cash flow. That year the group generated $411m in free cash flow from operations. As such, a drop of just $16.44 would have wiped out group cash flow. In the first half of this year, the oil price dropped by around $50 in four months.
These are only rough figures, but I believe they clearly illustrate the risks of investing in this sector. Companies can make or lose fortunes overnight.
Still, I’m comfortable with the level of risk involved in investing with these businesses. That’s why I’ve been looking for the best stocks to buy right now as the price of oil recovers.
The best oil stocks to buy right now
Tullow Oil is one of the firms on my list. This company is a very high-risk investment. It’s currently involved in renegotiating the terms of its debt with lenders. If management fails, the group could collapse. However, if the business succeeds, the share price could rally as Tullow gains breathing space.
At the end of November, the company projected it could generate as much as $7bn in cash from operations over the next decade. Its current market capitalisation is £431m. I think this shows just how much potential the business has. That’s why I’d buy it for my portfolio.
Green energy
Royal Dutch Shell is another group that features on my list of the best oil stocks to buy now. The company, which is one of the world’s largest oil producers, recently unveiled a plan to invest billions of dollars in renewable energy over the next 30 years.
Of course, the company isn’t without its risks. It has a lot of debt, and the low oil price also meant the business had to write off billions of dollars of assets last year. Nevertheless, despite these challenges, I’m optimistic about the groups future. That’s why I’d buy it today.
Large payout
Finally, I think one of the best oil stocks to buy right now is Cairn Energy (LSE: CNE). There’s been a cloud hanging over this company for the past few years after India seized a 10% stake in its subsidiary there.
The company has been fighting the government for compensation, and a court recently ruled in its favour, awarding the business $1.2bn (£870m) in damages. The sum hasn’t been paid yet, but it could be a huge positive for the £900m market-cap firm.
Of course, there’s a high chance India may not pay. In that case, Carin’s future is more uncertain. That’s the most significant risk facing the business right now. But this is a high-risk, high-reward bet on an enormous payoff to the company.
Still, I’m comfortable with this level of risk. That’s why I’d buy Cairn today.
