Maybe it takes a dinosaur to love a dinosaur. In disclosing a new $3 billion stake in Exxon Mobil (NYSE: XOM) last month, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) backed an oil giant others have recently written off as a clumsy beast lumbering toward irrelevance or worse.  

But the legendary investor likely sees instead a cash machine with the immense resources required to invest in new opportunities around the globe and undervalued downstream assets that will cushion any drop in oil prices.

The combination of steady or somewhat cheaper crude, improving economic growth and efforts to expand output beyond the North American shale boom ought to prove fruitful for the oil majors. It might even provide them with another opportunity to snap up the most profitable gas producers while natural gas is still down a lot, unlike when Exxon overpaid for XTO in 2010.

What follows is a sector-by-sector price forecast for next year, along with stock picks anticipating the predicted trends. These run the gamut from longtime portfolio mainstays Chevron (NYSE: CVX) and EOG Resources (NYSE: EOG) to Marcellus natural gas pioneer Cabot Oil & Gas (NYSE: COG) and solar technology leader First Solar (NYSE: FSLR). Investing in strong businesses like these, rather than stories or fads, is an energy investor’s clearest path to profit.

Global Crude

Brent crude traded worldwide  should hold within the prevailing range next year, with odds favoring a finish somewhat below current levels.  Propping up prices will be ever-growing demand in emerging markets, which are expected to account for virtually all of the expected 1.2 million barrel-per-day global consumption increase. But US fuel consumption has recently been up 4 percent year-over-year, and the International Energy Agency believes a recovering US and Europe could become meaningful contributors to global demand growth next year.

The other price support will be the negligible production growth outside of North America, with Iran embargoed, Venezuela badly mismanaged, Libya lawless and Iraq still violence prone. The struggles of these traditional OPEC heavyweights should give Saudi Arabia plenty of leverage to cap supply, keeping the price in line.

Yet as the next year progresses the market could begin to price in the likelihood that Iran and Venezuela will seek to increase exports by any means necessary, even at the expense of political dogma. Libyan and Iraqi oil should also flow in greater abundance over the long haul, given the financial incentives.

When these countries do seek to make up for lost time, they’ll find oil services giant Schlumberger (NYSE: SLB) and oil majors like Exxon and Chevron to be indispensable partners. For a vision of the change to come, look no further than Mexico, which recently ended the state-owned Pemex’s 75-year oil monopoly, opening up to private foreign capital in order to increase flagging output.

Oil majors and oil services giants are perfectly placed to export the advanced drilling techniques perfected in the US shale basins. The emerging opportunities in Mexico and, soon, elsewhere, should provide them with new avenues for growth.

Yet such opportunities will bear fruit too late to boost supplies next year. In the meantime, with Middle East tensions ready to boil over at any time and emerging-market land ventures still seen as quite risky, expect continued focus on offshore drilling. Aggressive Portfolio holding Seadrill (NYSE: SDRL) has been heavily discounted of late on worries that the recent slowdown in orders will persist. But with a 10 percent yield, the newest fleet and favorable market fundamentals, Seadrill won’t stay down for long.

As for Chevron, it offers a dividend yield 25 percent richer than Exxon’s, modest revenue growth in contrast with Exxon’s modest slide, a cheaper valuation relative to cash flow and perhaps more room to increase share buybacks as well. The newly issued 2014 capital spending plan forecasts a 5.2 percent decline from this year’s total to some $40 billion, with further reduction likely in 2015 after the massive and unexpectedly costly Gorgon Australian gas export project finally comes on line. Chevron’s also on the leading edge of the international shale push with exploration joint ventures in Argentina and Poland.

Buy CVX below $125, SLB below $100 and SDRL below $50.    

Domestic Crude

In contrast to the relatively constrained supply of global crude, domestic oil is expected to become increasingly plentiful next year as fast developing shale plays Eagle Ford and the Bakken ramp up production alongside older basins like the Permian in Texas.

The rapidly increasing domestic output should keep the price of the domestic benchmark, the West Texas Intermediate, well below that of Brent. But the US is not entirely disconnected from the global market, since the domestic output is still crowding out crude imports. And since the world is counting on North American production gains to offset Asia’s growth, it seems unlikely the WTI would trade below $85 for long.

Even that price would leave the lowest-cost domestic drillers awash in profit while curbing investment in basins with lower returns. No domestic driller is as well placed to weather a moderate correction or to mint money in another crude rally as EOG Resources, which earned a cash margin of more than $40 a barrel in its most recent quarter, while selling its crude at an average premium of more than 8 percent to the WTI year-to-date. EOG has averaged annual organic crude production growth of 43 percent over the last three years and does not appear to be slowing down, as its best-in-industry Eagle Ford wells continue to produce above expectations. Dividend growth has increased at a 20 percent compounded annual rate over the last 14 years, including this year’s 10 percent boost, though the yield remains tiny at 0.4 percent. But this is a stock to own for growth rather than income, and it remains the most attractive large-cap acquisition target for any oil-major looking to dramatically increase its continental US footprint.

The Eagle Ford has also been very, very good to the much smaller driller Carrizo Oil & Gas (Nasdaq: CRZO), which over the last three years has transformed itself from a natural gas producer into a highly efficient and conservatively managed shale oil growth story. Carrizo grew output more than 40 percent this year and plans to maintain a similar pace in 2014 as it continues to prove the value of its acreage. Should WTI crude retreat to $85, its annual rate of return on Eagle Ford wells would drop to 57 percent, from 87 percent when WTI is at $100, the company estimates. Carrizo  is also developing acreage in the Utica, the one shale play that may challenge Eagle Ford on profitability. Meanwhile, EOG is also active in the Bakken and the Permian.

Buy EOG below $180 and CRZO below $46.

Refined Fuels

The recent discounts on gasoline should persist into 2014, as the refiners that have added capacity in recent years seek to maximize returns, turning increasingly to exports bound for Latin America and Europe. This is a competition they can win given access to cheaper domestic feedstock and more modernized, efficient refineries. But the domestic margin will likely depend on the continuation of the recently encouraging US demand trends, and on that score many appear to have priced in quite a bit of the potential good news. Among the four refiners we upgraded to Buys in October  only HollyFrontier (NYSE: HFC) remains below its price target. Our sister publication MLP Profits is recommending Western Refining (NYSE: WNR) which recently acquired a controlling interest in a refining MLP and may drop down its own plants into that structure, which offers higher market valuations.  Buy HFC below $53 and WNR below $46.

Natural Gas

Natural gas prices recently surged to an 18-month high as a cold snap gripping much of the US spurred big withdrawals from storage. Yet even if this price spike melts with the late winter snows it will have offered a preview of the coming attractions, as projects to export liquefied natural gas and to covert natural gas liquids into petrochemical feedstock and fuel exports come online, exerting significant upward pressure on demand. This story won’t fully play out until the second half of this decade, but with costly liquefaction complexes under construction or at the end of the approval process the market is already sniffing out the likelihood of higher prices in the long run.

Supply, meanwhile, is constrained by the fact that even at the current elevated price few gas projects outside the bountiful Marcellus shale can compete with the returns available in crude oil. That’s left Marcellus as the only profitable gas story around at the moment, and means the lowest-cost drillers in this formation can ramp up their production very fast without creating a nationwide glut.

Our favorite Marcellus drillers are Cabot Oil & Gas (NYSE: COG), EQT Resources (NYSE: EQT) and Antero Resources (NYSE: AR), which is also the premier name in Utica. Devon Energy (NYSE: DVN) deserves a look as well, because its big domestic gas reserves provide it with an option on higher prices even as it races to boost oil output with a big new investment in the Eagle Ford.

Buy COG below $42.50, EQT below $95 and AR below $62.

Solar Flares

Among alternatives to oil and gas, solar has flashed the most promise of late. We’re big fans of solar pioneer First Solar, which continues to drive down the cost of photovoltaic cells to win large-scale new projects from US utilities. Buy FSLR below $67.

Three sectors where investors need to exercise greater caution are in coal, nuclear power, and advanced biofuels.

Coal: A Sunset Industry in the US?

US coal consumption grew steadily during the 1970s, 80s, and 90s, but plunged 24 percent from 2007 to 2012. There are several reasons behind this decline, but the single biggest factor was the electric power industry shifting from coal to cleaner-burning natural gas. Between 2008 and 2012 the fraction of electricity derived from burning natural gas in the US rose from 20 percent to 30 percent, while coal’s share declined from 48 percent to 37 percent. (Coal’s share has rebounded slightly this year as a result of higher natural gas prices).

Nevertheless, there may be a bargain or two to be found among US coal producers that have mostly seen their market caps decimated in the past three years. One is Alliance Holdings GP (Nasdaq: AHGP), which has hung in there thanks to its low costs and long-term supply contracts.

Alliance Resources Partners (Nasdaq: ARLP), the master limited partnership for which AHGP serves as the general partner and from which it derives all its revenue, reported a 5 percent year-over-year revenue gain for Q3, while its earnings before items jumped 24 percent, boosted by a charge a year ago. And while ARLP raised its distribution 8.3 percent year-over-year, the new $3.23 annualized distribution rate set by AHGP works out to a 12.2 percent year-over-year raise as well as a 5.9 percent yield based on the current unit price.

CEO Joseph W. Craft III said market conditions for coal remain “difficult” as a result of intense competition, mild weather and “a stagnant economy in critical coal-burning regions,” though he continued to predict an improvement next year, when several new mines should bolster the coal miner’s profits. In the meantime, that 5.9 percent yield and the double-digit distribution growth rate are backed by a healthy distribution coverage ratio of 1.55 times, up from 1.45 times a year ago. Debt remains modest at 1.14 times trailing Ebitda.

AHGP remains the safest coal play, as evidenced by its outperformance relative to coal stocks in recent months, with plenty of leverage should prices and demand improve. Buy AHGP below $68.

A Cloudy Outlook for Nuclear

Before March 11, 2011 the future of the global nuclear power industry looked bright. Growing concerns over climate change had increased interest in the nuclear power option as a low-carbon alternative to coal-fired power plants. A quarter of a century had passed since the devastating Chernobyl nuclear accident in 1986, and attitudes toward nuclear power were improving.

But the March 2011 Fukushima-Daiichi incident in Japan reminds us why many investors  have shied away from companies in the nuclear power sector.

Nuclear power has long been an important part of the world’s electricity generating mix, presently accounting for about 15 percent of global electricity production. Under normal operations, a nuclear plant produces no carbon dioxide emissions, and therefore nuclear power is often mentioned as an important tool in the world’s efforts to rein in carbon emissions.

Developing countries like India and China are expected to continue down a path of rapidly expanding their nuclear power production. Mainland China has 17 nuclear power reactors in operation, and another 30 under construction. More still are on the drawing board.

India currently has six operating nuclear power plants, and the seven now under construction  should more than double the country’s nuclear generating capacity by 2016. India is also on the forefront of developing thorium reactor technology, widely viewed as a safer, albeit not yet commercially proven nuclear power option.

But the developed world has greatly slowed down construction of new nuclear capacity in the wake of the tragedy in Japan.

One name we do like in this field is Growth Portfolio holding Chicago Bridge and Iron (NYSE: CBI), recommended to subscribers this spring shortly before Berkshire-Hathaway unveiled a big investment, CBI is involved in building nuclear plants in China as well as the US, and also specializes in the LNG infrastructure now in high demand around the world.  Buy CBI below $84. 

Avoid Advanced Biofuels

There are no worthwhile exceptions in the advanced biofuels sector to recommend. Companies like Gevo (Nasdaq: GEVO) and KiOR (Nasdaq: KIOR), which debuted in 2011 to much fanfare and hype, have seen their share prices decline by 93 percent and 90 percent respectively after persistently failing to meet investor expectations.

Their struggles boil down to the fundamental challenges of growing, transporting, and converting low energy density biomass to fuels, versus the challenge of drilling for, transporting, and refining energy-dense crude oil. At some point in the future the former may be competitive with the latter, but we are still nowhere near that point. This is a sector that will have few winners, and it’s very risky for investors to attempt to figure out which, if any of these advanced biofuels have true promise. Steer clear.