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4 Domestic Oil Stocks With Less Risk - 27946 views
WINDERMERE, Fla. (Stockpickr) -- Companies that are highly leveraged to the domestic crude oil market look to be in for one heck of a fantastic 2011, now that a number of large oil exporting nations are locked in political unrest.
Unless you live around a rock, you’ve probably already heard about how strong crude oil is acting on the commodity exchanges. West Texas Intermediate crude for April delivery is currently trading above $101 a barrel, and Brent crude oil is doing even better, trading at around $114 per barrel. The trend is so strong in crude oil that West Texas Intermediate crude registered its largest weekly gain in over two years last week, rising by more than 9%.
The unrest in the Middle East is clearly the catalyst that is helping to push crude oil prices through the roof. The fear in the markets is that the turmoil in Libya, Bahrain, Yemen and Egypt is going to spread throughout the rest of the region and potentially hit some of the largest oil-exporting nations. Some of those fears are starting to become a reality now, with protests already starting to pop up in both Iran and Saudi Arabia.
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The Saudis are so concerned about the potential of a political uprising that they’ve recently announced a huge social benefits package that totaled more than $35 billion and included unemployment benefits, housing subsidies, funds to support the study abroad and a number of new job opportunities created by the state. The Saudis are taking such drastic action because they know if there was to be a toppling of their regime it would destabilize the entire world energy market. For the record, there really is no precedent for what could happen if Saudi Arabia’s oil production went offline.
How serious is the situation in Saudi Arabia? Well, it’s serious enough when you consider that there’s a Facebook campaign calling for a “day of rage” in Saudi Arabia on March 11. The protesters are demanding an elected ruler, greater freedom for women and the release of political prisoners. Keep March 11 on your radar because if the unrest does take hold, it could be a game change for the crude oil market.
There are some famous Wall Street traders and analysts who are now openly saying that if oil production grinded to a halt in Saudi Arabia, then crude could reach $150 to $200 per barrel. In a recent interview with the BBC, Jim Rogers said that crude oil could trade well over $200 per barrel. T. Boone Pickens told Bloomberg Television that oil prices could jump as high as $120 to $150 per barrel with escalating tension in the Middle East and Northern Africa.
With all of this in mind, let’s take a look at some domestic oil stocks that could be setting up to trend much higher. Since there’s so much unrest in the Middle East and North Africa, I think market players would be better served to look for opportunities in domestic oil plays. These companies don’t hold the same risk that global oil players do because they don’t have drilling and exploration projects in unstable parts of the world.
Take, for example, a global independent oil and natural gas player such as Apache (APA). When the social unrest hit Egypt, shares of Apache dropped from over $127 a share to a recent low of $110. Apache has significant exposure to Egypt so the market quickly started to discount the stock. Exxon Mobil (XOM) also has large exposure to the Middle East and Asia-Pacific at 25% and could be very vulnerable to a big drop if further unrest spreads throughout the Middle East.
Credit Suisse recently put out a note to clients that highlighted a number of oil companies, including Marathon Oil (MRO), Hess (HES) and Enersis (ENI), that have notable exposure to Libya and other troubled parts of the Middle East.
Since so many large global oil companies have at least some exposure to troubled parts of the world like the Middle East, I think it’s a better idea to buy up domestic players who’re insulated from these risks.
Evolution Petroleum (EPM) is a petroleum firm engaged in the acquisition, exploitation and development of properties for the production of crude oil and natural gas, onshore in the U.S. Evolution has developed core oil and gas assets in Northeast Louisiana, East Oklahoma, South Texas and Central Texas. This stock is off to a strong start in 2011 with shares already up over 22%.
This company’s most-recent quarter wasn’t a speculator one, with the firm reporting a second-quarter net loss of $465,535, or 2 cents per share, vs. a net loss of $701,940, or 3 cents per share, from the year earlier. Total revenue for the second quarter rose to $1.18 million vs. $1.2 million for the same quarter last year. The company has a market cap of $215 million and $2.67 million in cash on the books with zero debt.
From a technical standpoint, the stock looks very strong with a bullish uptrend in place for the past six months. During that timeframe, the stock has been making higher highs and higher lows and it has recently broken out above some past overhead resistance at around $7.50 to $7.90 a share. That recent breakout took the stock to a brand new 52-week high of $8.39. Shares have since then cooled off a bit and are now trading at around $8 a share.
I would look to buy this stock on any weakness as long as it can stay above the 50-day moving average of around $7 a share. As long as oil prices continue to trend higher, then EPM should follow suit.
SandRidge (SD) is a natural gas and oil firm engaged in the exploration, development and production activities related to the exploitation of its holdings in West Texas. Its areas of focus are the West Texas Overthrust (the WTO), the Permian Basin, the Mid-Continent, the Cotton Valley Trend in East Texas, the Gulf Coast, and the Gulf of Mexico. Basically, nowhere near any of the troubled spots that litter the landscape of the Middle East. This stock has been setting the market on fire in 2011 with shares up over 45%.
SandRidge is a stock that Jim Cramer has talked about positively of late, and I can easily see why he likes this name. The company was smart to change its focus in 2009 and expand its oil business from 18% of production to nearly a 50/50 split now between oil and natural gas. SandRidge expects to make around 80% of its revenue from oil by 2012. This is what makes me so attracted to SandRidge. It has no Middle East exposure, and its recent transition to be more heavily weighted toward oil make the stock a leveraged play on higher crude prices.
Wall Street analysts are starting to warm up to the stock as well, with KeyBanc recently upgrading it to a buy with a $16 price target. SandRidge also just raised its oil production guidance for the first time in over six quarters to 23.3 million barrels this year, which is well above their previous forecast of 21.6 million.
As long as SandRidge can keep their oil acquisition costs down, then the stock should continue to soar right alongside with rising crude oil prices as their profits expand. Another potential catalyst that could send SandRidge higher would be the continued short covering by the bears in the stock. The current short interest as a percentage of the float for SD stands at around 7.5% as of Feb. 15.
From a technical standpoint, what I would watch for now with SD is for a breakout to take hold if the stock can manage to trade above some past overhead resistance at around $11 to $12 a share. If you see that move happen, look for volume that’s well above the three-month average daily activity of 10 million shares. If we get it, I think this stock will be printing $15 a share or possibly even higher in no time.
One high-profile bullish bet on SD comes from T. Boone Pickens' BP Capital, which as of the most-recent reporting period owned 1.9 million shares of the stock, for 5.1% of the total BP Capital portfolio.
GeoResources (GEOI) is an independent oil and gas company engaged in the acquisition and development of oil and gas reserves through purchases of reserves, re-engineering, development and exploration activists focused in the Southwest, Gulf Coast and Williston Basin areas of the U.S. This is another domestic oil name that’s off to a blazing start in 2011 with shares up a whopping 44%. GeoResources has a market cap of $632.52 million and trades at a forward price-to-earnings of around 20.
This company has direct exposure to the booming Bakken oil shale region of North Dakota which is reported to be producing high-quality oil wells and has an estimated 4.65 billion barrels of crude oil. The company currently has an oil weighting in its overall mix of production of around 55%, but if they expand their Bakken exposure some analysts think their oil exposure could jump to 70% or higher. Fadel Gheit, an oil industry analyst with Oppenheimer, recently said that oil shale companies such as Chesapeake Energy (CHK) and GeoResources basically start printing money once oil trades above $90 a barrel.
From a technical standpoint, GEOI is uptrending nicely with shares currently trading very close to its 52-week high of $32.24, which is also the stock’s all-time high. It’s hard to make a case against any stock that’s printing all-time highs because it simply means that just about anyone who’s ever bought the stock is making money.
If crude oil continues to boom to the upside for the rest of 2011, then I expect GEOI to follow that trend and advance significantly higher from its current levels.
Kodiak Oil & Gas
Denver-based Kodiak Oil & Gas (KOG) is an independent exploration and production firm focused on exploring, developing and producing oil and natural gas in the U.S. Rocky Mountain region. Its core areas of interest include the Williston Basin in Montana and North Dakota, where highly prospective Bakken shale and Three Forks oil is targeted. Just like GEOI, Kodiak is highly leveraged to the booming oil shale Bakken region. This stock hasn’t taken off just yet with shares up only around 9% so far this year.
Kodiak recently reported record year-end 2010 proven reserves and record production and sales volumes for the quarter and year ending on Dec. 31, 2010. This company has a market cap of $1.07 billion and trades at a forward price-to-earnings of around 17. Kodiak’s balance sheet is also very healthy with over $61 million in cash on the books and zero debt.
It’s also worth noting that this stock is heavily shorted with the current short interest as a percentage of the float at around 9.2% as of Feb. 15. The bears that’re shorting this stock have even increased their positions recently by around 6.7% or 970,120 shares. If this stock can continue to uptrend, then we could be in for an even larger short squeeze than the stock has already seen.
From a technical standpoint, this stock just recently broke out to a new all-time high of 7.70 a share after it cleared some major past resistance at around $7 a share. This is extremely bullish price action and it could mean that KOG is setting up to enter a new bullish phase that could take the stock significantly higher. I would look to buy this stock on any weakness as long as it continues to trade above the 50-day moving average of around $6.30 a share.
To see more U.S. domestic oil stocks that don’t have exposure to unstable parts of the world, check out the U.S. Domestic Oil Stock Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.