Black Gold: 5 Oil Stocks To Watch For a Massive Rally When Oil Prices Recover

Transcription

1 Disclaimer: This report is to be considered as entertainment value alone. No recommendations to buy any stock are being made. Your investment and trading decisions are solely your responsibility. All research presented in this report should be verified by your own research. Also, things in the market change with great fluidity, so understand that over the course of several weeks or months that this report s findings could be proven wrong if oil prices recover meaningfully. Black Gold: 5 Oil Stocks To Watch For a Massive Rally When Oil Prices Recover

2 Introduction: Whenever there is a major selloff in the stock market there is often a buying opportunity as good companies and industries are often discounted in the selloff. Such is the case with the recent downturn in the oil and gas industries. Many companies in the oil industry have seen their prospects for earnings and profits decrease as the recent price of oil has fallen tremendously. However, as is often the case investors have thrown the baby out with the bathwater, as many profitable and successful companies have been given little prospect for making money in this downturn. Even with oil falling 70% over the last year and now trading close to $30 a barrel there still opportunity within the market. Anyone who routinely watches the stock market knows and understands that the oil market is very fickle. From the 1980s through the 1990s, oil traded in a tight range from $10 a barrel up to about $30 a barrel. It is important to note that in the 1970s oil prices were much higher, which led to a booming oil economy in Texas during that period. Once the price readjusted back to the trading range of the 80s and 90s many businesses in Texas, which were dependent on oil, lost value and eventually went out of business or taken over. In fact, it wasn t until the late 1990s and early 2000 s that oil prices recovered and a new boom began in the oil exploration field in the United States. Thus, what has been witnessed in the oil and gas market over the last year has happened previously and can give some future visibility to investors who pay attention to lessons of the 70s and 80s. While businesses will fail and many market participants collapse, there will be success stories and plenty of opportunity for strategic, smart minded investors. This report looks to give some indication of potential winners in the oil and gas market after this collapse. It must be noted that some of these investment options and suggestions are speculative. Therefore, you should use your own good sense and due diligence in picking the correct stock play for your particular circumstances. These are stock predictions and means that the price could go against this analysis. One common theme that can be seen when oil prices fall is that one of the major industries impacted by falling prices is the refinery business. In a falling price environment, it makes sense that refinery would suffer, as the product that they are refinery from crude oil to gasoline or other usable gases will be less valuable. However, one aspect that the market usually ignores is that once prices stabilize

3 in a new trading range, the refinery business usually recovers quickly. This is explained because people will still be utilizing gasoline and the inputted crude oil is usually refined in a short period of time; thus, decreasing the exposure of the refiner falling oil prices. Consider that $30 a barrel oil could still fall; however, the downside is rather limited at this point, especially when compared to the fall from $100. Therefore, refiners while still potentially exposed to falling oil prices have probably witnessed the worst of the falling gas prices at this point. In this situation, two of the companies presented in this report are refiners and may be properly set up for a rebound. The other major stocks in this report are oil and gas exploration companies. These businesses remain susceptible to lower oil prices. However, their balance sheets and fundamental analysis indicate that the companies may be well positioned to handle this downturn. In fact, all of the businesses in this report have a few things in common. Their debt loads are manageable and the companies cash on hand and book values are reasonably supportive of the current or future higher prices. Thus, these companies are more than likely well positioned to weather any storm or continued storm in the oil and gas markets. Most of the companies in this report are seasoned businesses and are thus more likely to have managements, which have weathered downturns in the oil and gas industry in the past. Therefore, the two primary criteria for a business to be included in this report are that their financial position is such that they can weather a downturn and that the company s management team or business model should be such that the business can handle a slowdown. It should be pointed out that these stocks were recently classified as big cap stocks. However, because of the fall of oil, these large cap stocks are now mid-cap and small-cap stocks. It is because of this recent change that many of these companies balance sheets and total assets are over $1 billion in market value. Obviously, this is indication of just how far the stock prices have fallen in the recent months and year. The following five stocks are suggested for their potential rebound as oil prices study.

4 ATW Atwood Oceanic s Current Price $ week Price Range $4.32 to $35.66 Cash per share $1.79 Est. earnings per share $4.42 Sept Short term assets $517 million Total Assets $4.7 billion Short term Debt $117 million Total Debt $1.77 billion Short interest 49.62% Book Value per share $46.06

5 Atwood Oceanics is a drilling company that specializes in ocean drilling for oil. The company was founded in 1968 and is headquartered in Houston, Texas. Therefore, the company has not only lived through several boom and bust cycles, but it has almost 50 years of experience in ocean oil well drilling. Like many companies that have seen the recent downturn in the oil market, the company has a high book value per share at just over $45 per share. With the current stock price being just over 10% of the book value the company may offer some clear upside and protection against further selloffs. Further supporting this idea that the stock price may have hit or be near bottom, is the fact that it has one of the highest short interest rates on the stock market, with nearly 50% of the shares being short. Thus, if a short covering takes place in this stock, investors could see stock price rise significantly as the shorts run for the exits to cover. The fundamentals at Atwood Oceanics are such the company has significant cash reserves to cover short-term debt. Even if the company were to pay off shortterm debt with all short-term assets and nothing from earnings, the company would still have $400 million in short-term assets. Building upon this idea the company could pay off all of its debt from its assets and still have $3 billion in capital. This should give Atwood Oceanics some extra cover should they have to write down some of the value of their assets. Additionally, note that the company is expected to have a profit of about four dollars per share for the current year. This represents one of the highest levels of estimated positive cash earnings for any of the businesses in the industry. Thus, Atwood has positioned itself to be in a position of strength even as oil prices and drilling contracts fall. Atwood Oceanics may be a clear-cut example of a solid company being penalized for being in the wrong industry.

6 BBG Bill Barrett Corp. Current Price $ week Price Range $2.19 to $11.90 Cash per share $2.33 Est. earnings per share -$1.29 Dec Short term assets $270 million Total Assets $1.5 billion Short term Debt $200 million Total Debt $1.2 billion Short interest 25.14% Book Value per share $11.74

7 Out of the five stocks presented in this report, Bill Barrett would have to be considered the most speculative of the five. The company does face significant challenges as does many of the companies in the oil industry. However, this company does have some solid financials and could be in a position to weather the storm. Bill Barrett was founded in 2002 in Denver Colorado and is a specialist in the drilling of oil in the Rocky Mountain region. One concern of any company involved in drilling in the Rocky Mountain region is that it may be more expensive to secure oil from this area. Thus, it is possible that the costs for gathering oil may be higher than the than the price of oil, which would make the company s operations unprofitable. Hence, the main reason that Bill Barrett has suffered so much in this selloff. However, should oil remain in the current level or the company s operations become sufficient enough to maintain a profit at the current price level of oil, the company may be a potential rebound stock. Supporting the thesis for investment in Bill Barrett is that the company is currently trading near its cash per share valuation. Even if total current assets were used to pay short-term debt, the company would still have $70 million left over. The main issue facing Bill Barrett would be the long-term prospects in its current debt load if the company has to devalue some of its assets, the valuation could become negative for the company. On the other hand, should the company prove able to manage through the downturn in oil there could be a quick and sudden pop up in the value of the stock. Supporting this pop would be that the company has significant short interest at over 25% of the shares sold short. Again, this company could benefit from a quick exodus of the short seller in the stock market. Although as was pointed out this is still a speculative position and the stock could continue to slip.

8 ESV Ensco Current Price $ week Price Range $7.55 to $28.75 Cash per share $4.63 Est. earnings per share $2.95 Short term assets $2.4 billion Total Assets $16.44 billion Short Term Debt $803 million Total Debt $7.4 billion Short interest 10.39% Book Value per share $ 38.26

9 Ensco is the largest of the companies in this report by market cap size. It would still be considered a large cap stock. However, the current price of under $10 represents significant potential for investors who focus on low or small stock prices. Ensco was founded in 1975 as an international driller of oil wells at sea. The company is based in London, England and has weathered many ups and downs in the oil market for over 40 years. In fact, Ensco is probably one of the clearest examples of a company being thrown out because of the industry it is in. Please note that the company has over $2 billion in short-term assets. This number represents four times the amount of debt that the company currently has a short-term debt. Additionally, the short-term assets of the company are approximately one third of the total debt on the company s books. Thus, Ensco is in an excellent position from a financial basis. Even if its long-term assets were written down, the company should have more than enough financial resources to cover all of its debt with money left over its assets. The company is expected to continue earning profits in the upcoming year, at approximately three dollars a share. Thus, Ensco represents one of the best potential investments should the stock market trend against oil companies reverse and oil prices become steady. The only potential downside to Ensco from its fundamental analysis is that the short interest in the company is relatively low at 10%. However, with the current price of $8.32, which is less than a dollar from its 52-week low, the company may recover and the stock price close above $10 a share.

10 ALJ Alon USA Current Price $10,28 52 week Price Range $9.74 to $23.29 Cash per share $3.42 Est. earnings per share $0.52 Short term assets $559 million Total Assets $2.2 billion Short Term Debt $397 million Total Debt $1.5 billion Short interest 30.07% Book Value per share $10.07

11 Alon USA is a refinery company, which was founded in 2000 and headquartered out of Dallas, Texas. The company maintains refineries in the southwest part of the United States and supplies gasoline to such locations as Southwest California and Texas. Thus, the company s operations are concentration on some of the fastest-growing areas in the US, which would translate into significant demand for gasoline products. As was explained earlier, refineries often underperform when gas and oil prices are falling. However, once the price of oil stabilizes or enters a trading range, the refineries usually return to profitable operations. Such should be the understanding Alon USA. The company is currently trading within $.50 of its 52-week low. Additionally, the stock has approximately 30% of its shares sold short. Thus, as soon as the oil prices and gasoline prices settled down the stock could see a sudden and sharp short covering correction, which could significantly increase the underlying stock price. Note that the company s current assets are proximately $160 million more than the current debt. Additionally, total assets of the company are about $700 million than the total debt of the company. These two points should indicate that the company is well positioned to handle a slowdown in the oil patch. However, one item of particular note about a refinery is that its assets, especially the company s fixed assets, such as plants and property, will often retain their value when compared to other companies in the oil industry. This makes sense, as companies that drill for oil will see a greater potential for asset devaluations rather than companies that utilize oil to make gasoline and other oil products. Thus, Alon USA should not see as much decrease in its assets and as prices stabilize in the gasoline market it will see its profits maintained or increase.

12 DK Delek US Holdings Current Price $ week Price Range $12.54 to $41.15 Cash per share $ 5.89 Est. earnings per share $ 1.50 Short term assets $ 1 billion Total Assets $3.4 billion Short Term Debt $ 832 million Total Debt $ 2 billion Short Interest 4.3 % Book Value $19.48

13 Delek is another refinery company, which is headquartered in Brentwood, Tennessee and was founded in The company has refinery operations in the Southern US and also sells its products through company owned convenience stores and gas stations. Thus, the company has revenues not only from the sale of gasoline, but also from the sale of convenience products at its stores. Of special interest about Delek is that the company is well positioned to deal with the current downturn in oil prices. The company is expected to earn $1.50 per share in the upcoming year. This number represents an increase in company earnings as expectation is for the company to earn just over a dollar per share in the current year. Analyzing the company s stock price, the stock is trading just a few cents above its 52-week low. Thus, like several of the other stocks, this one has the potential for upside surprise as it is trading at less than a 10 P/E. The company currently has just over $1 billion in current assets with less than $850 million in current debt, representing $150 million positive balance on the balance sheet. Additionally, the total assets of the company minus total debt would represent a $1.4 billion surplus on the balance sheet. Again, like most refiners this company has been punished for falling oil prices, which means it could benefit once prices stabilize. Thus, while the company may have to wait for the market to become comfortable with a new oil price trading range, it does have value that should support it up to its current book value of nearly $20 per share.

14 Conclusion: This report gives you 5 stocks to consider that could emerge as not only survivors but also as winners as the field of U.S. based drilling companies narrows. Both drillers and refiners in this report could see nice rallies in the coming months, especially if oil were to rally to over $40 per barrel. It is still true that these companies fortunes are dependent on oil prices, but the thinking presented here is that these stocks are the best houses in a bad neighborhood. I hope you enjoy this report, print out a copy for easy reference. It s easy to get clutter on your computer and forget about reports you download trust me I know. ;-) Sincerely, Matt Morris MM Publishing Inc. Microcapmillionaires.com