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Oil stocks: There will be profits

If you look past the big energy giants like Exxon Mobil and Chevron, there are still many good bargains in the energy sector.

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By Paul R. La Monica, CNNMoney.com editor at large

Stocks aim to extend gains
The mood is upbeat as investors shrug off sky-high oil prices and a gloomy economic growth forecast.
Oil stocks have had a rocky ride so far in 2008 but they have vastly outperformed the broader market as crude prices soar.

NEW YORK (CNNMoney.com) -- With oil prices around $100, it's a good time to ask if energy stocks could be a safe haven in a market coping with rising inflation fears.

The group has actually performed poorly this year over worries that a U.S. recession could crimp energy demand. The Amex Oil Index has fallen nearly 9% year-to-date.

In addition, as I wrote a few days ago, some market strategists think that investors may take more money out of last year's hot sectors like energy and tech and put cash into stocks that were pummeled in 2007.

But the energy sector has bounced back sharply in the past two weeks along with crude prices...and there still may be enough values in the group to make average investors as giddy about the sector's prospects as Daniel Day-Lewis' maniacal oil tycoon from "There Will Be Blood." ("I drink YOUR milkshake!")

Dan Pickering, co-president and head of research with Tudor, Pickering, Holt & Co., a Houston-based investment bank that focuses on the energy sector, said investors hunting for bargins should look beyond the giants like Exxon Mobil and new Dow component Chevron.

Pickering said he sees value in what he refers to as "stealth exploration and production" companies, firms that have a growing business in drilling for oil and gas but are known primarily for other energy-related operations.

Pickering said his firm is bullish on Equitable Resources (EQT), a Pittsburgh-based gas utility that also drills in the Appalachian region of the United States.

Pickering said it would not be a huge surprise if the company eventually split its production business from the utility side, which he believes could boost the company's stock price substantially.

He also likes two pipeline companies that have rapidly growing exploration divisions: El Paso (EP, Fortune 500) and Williams Companies (WMB, Fortune 500). Pickering has a "buy" on these two firms as well since they should benefit from high crude prices.

But Pickering also sees some good opportunities outside of the explorers.

He thinks there are values in some refiner stocks since they have been hit by weak profit margins. Refiners buy crude oil and convert it into gasoline, but high oil prices have yet to lead to rising gas prices.

As the year progresses, however, Pickering thinks consumers will eventually be paying more at the pump - before you know it, summer driving season will be here, after all. Valero (VLO, Fortune 500) is Pickering's favorite in the group.

Finally, Pickering said investors shouldn't ignore oil services firms, companies that supply equipment to the major energy exploration and production firms.

His top picks in this group are Transocean (RIG), a leading offshore contract driller, and diversified giant Schlumberger (SLB). Pickering said there is probably about 20% to 30% more upside with these stocks before he'd worry about them being too expensive.

So don't be scared by $100 oil. Instead, take advantage of the companies that have the best chance to profit from rising crude. Or as Day-Lewis' Daniel Plainview might say: "Drink them up!"

What do you think? With oil around $100 a barrel, do you think it's a good time to buy energy stocks? To top of page

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