Oil stocks: Best picks for 2008

Analysts say natual gas and oil service companies will do well in 2008, but are wary of refiners.

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NEW YORK (CNNMoney.com) -- It's not too late for investors to get in on the oil boom in 2008, analysts say, even with the near 30 percent runup in oil company stocks last year.

From companies that pull oil out of the ground, to the ones that turn it into gasoline, to the specialists that keep the wells flowing, the oil sector breaks down into lots of categories. And some categories are expected to do much better than others in 2008.

Experts generally expect nearly all oil stock sectors to do well in 2008 - although not as well as in 2007.

Here are four analysts' picks, category by category:

If you think the price of crude is going to go down, investors like Mark Gilman, an oil and gas analyst with the Benchmark Company, say go with the big boys.

With their diversification, high dividends and low stock prices compared to revenue, big oil companies that produce, refine and market oil and natural gas like Exxon Mobil (XOM, Fortune 500), BP (BP), ConocoPhillips (COP, Fortune 500), Chevron (CVX, Fortune 500) and Royal Dutch Shell (RDSA) make good defensive plays.

"They are likely to be more resilient in the face of declining crude prices," said Gilman, who thinks the sector in general will be disappointing.

Exxon Mobil saw one of its biggest stocks gains ever, over 30 percent, in the second half of 2006 when crude prices tanked from over $70 to around $50 a barrel and investors flocked to this "safe haven" category, according to Oppenheimer energy analyst Fadel Gheit.

But oil prices don't have to tank for these companies' stocks to go up - they gained between 15 and 31 percent in 2007 when oil prices soared 60 percent. They just didn't rise as fast as some of the specialty companies, which saw their shares surge 60, 70 or even 90 percent.

In the integrated space, Gheit likes BP, simply because he thinks the company's fortunes must change. Over the last few years, the British company has suffered a major pipeline spill in Alaska, a tipped-over rig in the Gulf of Mexico, a natural gas trading scandal, and a lethal refinery explosion.

"They've been in the penalty box for the last five years," said Gheit. "Everything that could go wrong went wrong."

As a result, BP's stock has suffered, at least relative to other "Big Oil" companies. It gained 15 percent in the last 12 months and 84 percent over the last five years, compared with Conoco's 26 percent gain over the last 12 months and 248 percent gain since 2002. It could be catch-up time for BP.

Most of these smaller companies produce and refine oil and gas, although much of their revenue comes from the exploration and production end.

Because of that, their stock prices are generally more closely tied to the price of crude oil. Anadarko (APC, Fortune 500), Occidental (OXY, Fortune 500), Marathon (MRO, Fortune 500), Murphy (MUR, Fortune 500) and Hess (HES, Fortune 500) saw their shares rise between 33 and 96 percent over the last 12 months.

Gheit likes Murphy, as it has guaranteed growth in production from new fields just coming online in Malaysia, he said.

Plus, Murphy shares are trading at less than one times estimated sales for the next four quarters, a bargain when compared to Anadarko's 2.6 times and Occidental's 3.7 times.

But other analysts like Anadarko and Apache (APA, Fortune 500), as they focus solely of exploration and production.

Finding new reserves to replace oil pumped out of the ground has been a challenge for the integrated oil companies in recent years, and companies that specialize in it are well positioned for growth.

"You have to find more [oil] than you pull out," said Steve Crower, an energy investment banker working for Starlight Capital out of Houston, an energy investment boutique. "And finding it will always be a challenge."

Most analysts say stay away.

Refiners make money from buying crude oil and turning it into gasoline. Problem is, over the last six months crude oil has hit record high prices, but gasoline hasn't. This has seriously hit the profit margins of companies like Valero (VLO, Fortune 500), Sunoco (SUN, Fortune 500), Frontier (FTO, Fortune 500) and Tesoro (TSO, Fortune 500).

Analysts say high oil prices should continue in 2008, while a slowing economy and consumer reaction to gasoline near $3 a gallon should limit new demand for gasoline, keeping gas prices from rising as much as oil prices.

'It doesn't bode well for refinery stocks," said Oppenheimer's Gheit.

Nearly everyone thinks this sector, which did well in 2007, will continue to do great in 2008.

"Gas is where the growth is going to be," said Crower. Gas prices "could easily double this year. It's going to be huge."

The enthusiasm comes from the fact that natural gas prices are cheap compared to oil. A barrel of oil usually costs about 6 to 9 times more than 1,000 cubic feet of natural gas. But now oil is about 12 times more expensive.

"Gas is selling at a steep discount," said Jack Aydin, an oil analyst at Keybanc Capital Markets.

For gas stocks, Aydin likes Cabot (COG), Range Resources (RRC), or Quicksilver (KWK), simply because they get nearly all their revenue from natural gas.

Of the big natural gas companies - Chesapeake (CHK, Fortune 500), EOG Resources (EOG) and XTO Energy (XTO, Fortune 500) - Chesapeake shares are trading at roughly 2.5 times estimated sales for the next four quarters, cheaper than EOG's 4.5 and XTO's 4.4.

Gheit also likes the gas sector, although he says it has nothing to do with price. He points to the fact that natural gas is a cleaner burning fuel - likely more desired in a world concerned with global warming.

He also notes that most natural gas is produced in North America. "We don't have to send kids to die to protect it," he said.

These guys keep the drilling platforms running, and have seen their shares soar along with the price of crude in recent years.

High crude prices make it all but certain oil companies will expand exploration and production efforts, which need the services these companies provide.

And because there's only a limited amount of skilled workers and equipment in this sector, analysts say it should continue to do well.

"They're already strapped for people, they're maxed out," said Crower.

Schlumberger (SLB) had a good run over the last 12 months - with the stock rising nearly 70 percent - and looks fairly expensive, trading at 4.5 times estimated sales for the next four quarters, at least twice that of other firms in the sector like Halliburton (HAL, Fortune 500), Baker Hughes (BHI, Fortune 500) and BJ Services (BJ, Fortune 500).

Gheit owns shares of BP, and Aydin's company has a banking relationship with Cabot, Range and Quicksilver.