Why the Smart Money is Flowing to Oil

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Open a newspaper and you'll see the same tales of woe.

Oil companies bleeding money. Workers being laid off. Operations being shut down.

It's not a great time to work in the energy sector.

Yet it is a great time to be an investor looking for bargains. The energy sector is full of them. It offers unmatched wealth-building opportunity.

If you can stomach a little volatility.

Don't just take our word for it. Take a look at how the biggest fish are investing.

There's no bigger whale than The Carlyle Group. The prominent private equity firm has nearly $200 billion in managed assets.

They're also preparing for a serious energy company buying spree. They've raised billions in recent weeks to acquire new assets in the energy sector.

The firm has already started snapping up assets. The Carlyle Group's international energy fund just paid $43 million for gas fields owned by Canada's Sterling Resources.

The move is the kind of opportunistic play that will surely be emulated by other investors. Energy companies are struggling to stay afloat amidst a stunning collapse in prices. The value of a barrel of Brent crude oil has dropped in half within the last year.

In a recent CBNC interview, Carlyle Group co-founder David Rubenstein said the energy sector offers more opportunities for buyers than any other category. He added that he's "bullish" on energy and believes great buying opportunities abound.

That kind of endorsement should be a clarion call to any smart investor. It's no mere appeal to authority, either.

Let's put it simply.

Private equity firms exist for one reason -- to make money for investors. Investors typically expect these returns within five to seven years.

One of the titans of the private equity world is feverishly raising billions to buy energy assets.

The Carlyle Group clearly believes there are massive bargains in the energy space. They would also seem to believe a rebound is coming within a relatively short time span.

Does this sound like an opportunity you should ignore?

How to benefit from the oil bust

The price of oil is way down. Energy companies are struggling to stay afloat. Stock prices are all over the place.

It's not a great sector to be in if you can't handle a little turbulence.

Yet it's critical to take the long view. If you invest in energy, you may lose money -- initially. The bottom might still be out there.

The rebound, however, is coming. Make no mistake about it.

The oil market has been oversupplied. The introduction of fracking and other new technologies created a glut.

Yet, as we can see by the Carlyle Group's buying spree, contraction is already under way. As unhealthy or overexposed energy companies and their assets are picked off, the market will stabilize. Prices and profits will rise.

Savvy investors will reap rich rewards.

Where to make your move

If you're going to buy energy stocks, where should you look? It's fairly simple. You want well-funded, diversified companies with healthy debt ratios. Adaptable companies. Companies with strong leadership.

Energy firms with oil refining capacity are of particular interest. They have outperformed the broader energy sector in the last year.

Given flat global demand for oil, this isn't a category rife with growth stocks. Yet companies such as Valero Energy, Marathon and Tesoro are all good bets to provide consistent returns over the long haul.

Fundamentally, it's vital to focus on one question: how clean is this company's balance sheet? It's tempting to go out on a limb and gamble on an overleveraged company whose stock has dropped like a ton of bricks. Seems like a huge potential payoff, right? Yet that's the wrong strategy.

Energy stocks have taken a severe beating. Even the fundamentally solid companies are down. Why bet on a bankruptcy-bound dog with fleas? There are plenty of companies with clean sheets from which to choose. It's a target rich environment for buyers.

Find companies with positive cash flow and reasonable debt. These companies more likely to survive and thrive. They are also in better position to snap up distressed assets. That's a state of affairs that usually leads to better stock performance.

Long-term wealth creation

Most observers believe oil prices won't turn around until the second half of 2015 -- at the earliest. That means investors still have a window of opportunity.

It's not smart to wait for the bottom, however. Goldman Sachs has predicted oil prices will reach $70 a barrel within 12 months. Consolidation will make the energy sector healthier. Turmoil in the Middle East could seriously affect supply at any time, ratcheting up prices.

The Carlyle Group clearly believes the energy sector is going to richly reward its investors. There's no reason why you shouldn't benefit as well.

Here's the formula. Find strong and diversified energy companies with clean balance sheets. Invest your money. Ignore the turbulence.

Then let the magic of the market -- and our insatiable need for fossil fuels -- do the rest.

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