3 Energy Stocks to Benefit from the Oil Price Rally

Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Michael Hulme, Manager of the Carmignac Portfolio Commodities Fund, to give his three stock picks.

Hi, Michael.

Michael Hulme: Hi, Emma.

Wall: So, what's the first stock today?

Hulme: Okay. Well, let's kick off with Anadarko Petroleum (APC). It's one of our bigger holdings and it's a U.S. exploration and production company. What does that actually mean? It means it produces just over 0.5 million barrels a day of oil and gas, mainly in the U.S. but also across the rest of the world. It has a number of interesting exploration opportunities. It's monetizing gas in Mozambique.

It's got a big gas portfolio in the U.S., an owned portfolio and it's probably pretty cheap in terms of a rising oil price scenario that we outlined in the previous video. So, we really like that one. I think on a maintenance free cash flow basis, it would be churning out a maintenance yield of about 8% in the next year or two if oil prices recover.

Wall: I suppose it's worth saying about any company within this sector, if it's doing well now after 18 months' of poor oil prices, actually the outlook looks good?

Hulme: Absolutely. And the key thing is, they survived the litmus test. They got downgraded by some of the credit agencies, but they didn't issue equity. They got a thumbs-up when they re-priced some of their bonds and they issued new credit and things are looking a lot rosier than they were a few months ago. So, that's the first pick.

The second pick is a company called, Cairn, Cairn Energy (CNE). Many of your U.K. viewers will be familiar with that company having discovered many years ago now a lot of oil in India which they successfully exploited and sold down. They were less successful drilling in Greenland. They spent $400 million of their Indian windfall in Greenland to not much avail sadly.

But now they are at it again and they have struck oil in Senegal and they have got a meaningful stake in the Senegal discovery. We think it's pretty big. We think although the company is playing it down, we think they might have just found 1 billion barrel oil field and the reason for that is the footprint of the oilfield, if you look from an airborne view, you are looking at over 100 square kilometers of oilfield and with pretty deep oil column.

So, the tank of oil that that field is holding is potentially pretty large and the good thing is, it's not one of these complex fields that are made of carbonates. It's a sandstone field. That means the oil is pretty easy to get out of the ground.

Wall: Because they do say that if we discover the oil in the North Sea now we never would dig it up if we've known the complications. There's different types of oil in the ground, aren't there? There's the very easy to get at and there's an extremely difficult to get at and it can be the difference between a company going under and succeeding?

Hulme: Absolutely. Now, the costs of getting this oil out in Senegal actually aren't that high. It's not too deep offshore. The wells will be expensive but not as expensive as, say, offshore Brazil that we've seen recently. It's really about numbers, Emma. If there is enough oil there that's running through these wells, you can make the numbers add up. And 1 billion barrels, if they do appraise that, that's a pretty big number. So, we like that one. We think it's not well understood by the market.

Wall: What's the third stock today?

Hulme: Third one is the appropriately named Darling Ingredients (DAR) and it is indeed the darling ingredient of our portfolio at the moment, if you'll excuse the pun. And Darling Ingredients does something that doesn't sound on the surface particularly attractive. It cleans up the grease and waste, what you call, yellow grease from restaurants and also from the carcasses of…

Wall: This is the fat in the chip fat fryer?

Hulme: Exactly. They are scraping out the fat in the chip fat. They are parking a van outside McDonald's and they are filling it up with old chip fat grease, yellow grease, and they are taking it down to Louisiana or one of their other plants and they are turning it into biofuel. And recently, they have just completed a new renewable diesel plant which really upgrades that fuel into something that effectively is interchangeable with a high-spec diesel.

So, if they do that and if they can flog it, for example, in California, they can benefit from oodles of effective subsidies. There's something called a low-carbon fuel standard, that's worth $1 gallon; there's something called the RIN, that's another $0.80 a gallon and then they get this tax credit.

So, the money is there and on the table given all this green legislation that we've seen both in Europe but also more importantly, in the U.S. just where this company is operating, for them to make pretty fat margins, again, if you'll excuse the pun. So, we really like that one. We think it's potentially trading on a free cash flow yield of around 10% or 10% plus and so that's one of the newer investments in our portfolio and we think it will do well.

Wall: Michael, thank you very much.

Hulme: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.