If it isn’t, it’s certainly a good place to begin nibbling… Oil prices may take yet another dip and take oil and gas stocks down with them.  I hope so – I want to buy much more than the small amount I own today.  Knowing that we cannot possibly catch the exact highs or exact lows, in times of market over-exuberance if there is a quality sector providing an essential product that has already been in its own private bear market hell, it is likely the best place to begin our search for value. 

Three oil and gas top-tier firms come immediately to mind: Royal Dutch Shell (we prefer the RDS-B shares), Total Petroleum (TOT,) and BP.  That’s not to disparage their even larger brethren, Exxon Mobil (XOM) and Chevron (CVX), but those two have not fallen as much.  If they should, they’ll be on our buy list as well.  (When I discuss big oil, I don’t include any Russian or Chinese firms which are de facto state-owned or oligarch-owned.)

The benefit of sticking with these major integrated energy firms is that we have virtually zero risk of default or bankruptcy.  No matter how low oil prices tumble, their diversification into both upstream (exploration and production) and downstream (refining and distribution/retail sales) keeps them in good stead.  When oil and gas prices are high, they make the most money, of course.  But even when prices of the commodity itself are low, that just reduces the big integrated firms’ cost of feedstock for their refineries and chemicals and plastics businesses.

I’ve done the math and, assuming the dividends of these giants aren’t cut, they look pretty good in any scenario.  If the market continues to leap ahead this year, it’s likely these companies will be carried along with the general euphoria, and with considerably less volatility than most other stocks along the way.  If the market is flat, they’ll likely stay roughly where they are (though a serious elevator shaft drop in oil prices would force us to remind ourselves daily that these are long-term investments!)  And if the market is down but oil doesn’t plunge to Citicorp’s (C) projection of $20 a barrel, they will bump along but, paying us more than 5.5% each to stick with them, give us a nice cushion against a 10% or so correction.

Let’s take a look at each of these three favorites of mine, then briefly mention the next tier down: