Navigating Oil with Jim Cramer – $SUN $ESV $RIG $OIH

On December 13, Jim Cramer talked to viewers of his popular “Mad Money” show about  oil. “If the technicals are any indicator,” Cramer said, “the greater oil service space could rise by as much as 40 percent in the next six months. As the price of oil continues to climb, he thinks oil drillers could see business boom.”

Jim Cramer

OIH (OIH): Cramer explained that investors could buy OIH, the oil service exchange-traded fund (ETF). As of the close of trading Tuesday, OIH was trading at $115.04, 16 times its earnings. While OIH  returns may have disappointed lately, its 3-year trailing return is 14.72%, compared to 9.43% for its category. Even now, with a year-to-date return of -10.20%, OIH is still outperforming its category, which has lost -11.19% since the first of the year. OIH also has some hedge fund love. At the end of the second quarter, Tye Schlegelmilch’s Sonterra Capital and Jim Simons’ Renaissance Technologies both had sizable positions in OIH, $395M and $76M respectively. However, Cramer advised against OIH for this play. Instead, he thinks that investors would be better off picking the best stocks from within the ETF. Cramer particularly likes offshore drillers.

Transocean (RIG): This offshore drilling company closed trading December 13 at $41.84 a share, or 12.27 times its future earnings, with a one-year target estimate of $62.53 a share. In addition to the upside, RIG also pays a high $3.16 dividend (7.30% dividend yield). Some analysts forecast RIG will reach as high as $80 a share in the next year. Leon Cooperman seems to like RIG. He increased his fund’s position in the company by 32.25% during the third quarter. But, RIG doesn’t peak Cramer’s interest. This offshore driller may be the largest offshore drilling company, and it does offer a high dividend yield, but Cramer isn’t buying.

Ensco (ESV): Cramer thinks that ESV, the second-largest offshore driller, is a better option. “Why buy Transocean trading at 12.3 times next year’s earnings when you could get the superior Ensco for just 8.5 times earnings with a 2.9% yield that’s much safer than Transocean’s dangerous dividend.” ESV closed trading on December 13 at $48.13,  with a one-year target estimate of $63.28. Forecasts for the company are strong. Analysts predict ESV’s earnings will grow by 17.79% per annum over the next five years, easily beating out its industry’s expectations of 16.07% and sector expectations of 15.66%. Several of the 300+ hedge funds we track had large positions in ESV at the end of June, including David Einhorn’s Greenlight Capital and Ken Griffin’s Citadel Investment Group.

Sunoco (SUN): As bullish as Cramer is on these oil plays, not all oil stocks are winners. Cramer is distinctly bearish on refinery stocks. He thinks their margins are going down and it is time to sell. Cramer said specifically that it was time to sell SUN. SUN closed trading December 13 at $37.86 a share, with a one-year target estimate of $44.38. Iyt also pays a 60 cents dividend (1.50% dividend yield).