Many oil stocks have declined in recent weeks due to the post-election market drop and concerns about the fiscal cliff. There are less than 30 days left for the president and Congress to find an agreement before major spending cuts and tax hikes automatically take place on December 31. This has been weighing on businesses and consumers for weeks and even months. Many investors remember that our leadership was unable to compromise last year which led to a credit downgrade of the United States. Both sides seem very far apart, but there is intense pressure to do something to avert a potential crisis. With time running short, the most likely outcome might be for the president and Congress to "punt", by simply extending the deadline until sometime next year. Not everyone will approve of this because it will keep uncertainty alive, but it could also avoid a worst-case scenario from taking place and give the market enough hope to rally on.
Oil stocks could be well-positioned for a year-end and January rally because many are now undervalued. Plus, the price of oil could rise on a fiscal cliff deal or an extension into the new year. With this in mind, here are a couple of undervalued oil stocks that are worth buying for potential gains into 2013:
BP plc (BP) has been working to get its focus back on exploration and production since the oil spill in the Gulf of Mexico, and it even recently agreed to settle some claims with the United States government for about $4.5 billion that were related to the spill. However, there are still challenges posed by the spill and the U.S. Environmental Protection Agency recently announced it would temporarily suspend the company from bidding on new federal contracts for oil and gas leases. That could make it difficult for BP to expand in the Gulf of Mexico and many other areas of the United States. It is unclear when the suspension will be lifted but it seems doubtful that it will last for too long. In the meanwhile, BP has plenty of exploration and production potential in other parts of the world as many countries are eager to see the job creation that comes with energy investment. Over time, the spill will fade into memory just as the Exxon (XOM) Valdez spill did many years ago. These types of negative headlines about the spill and suspension have kept pressure on the stock and that is allowing investors to buy the shares at a cheap valuation. BP trades for just about 8 times earnings and it pays a very generous dividend yield of over 5%. By contrast, the average stock in the S&P 500 Index trades for about 14 times earnings and yields just over 2%. BP shares also look undervalued when you consider that it trades for close to book value, which is just over $37 per share. Buying BP shares on dips is likely to pay off in the long-run and the dividend payment should keep investors happy while waiting for a higher share price.
Key Data Points For BP plc From Yahoo Finance:
- Current Share Price: $41
- 52-Week Range: $36.25 to $48.34
- Dividend: $2.16 which provides a yield of 5.2%
- 2012 Earnings Estimate: $4.99 per share
- 2013 Earnings Estimate: $5.17 per share
- P/E Ratio: about 8 times earnings
Marathon Oil Corporation (MRO) is making major investments which could lead to above-average growth in the coming years. This oil company recently announced it would spend about $5.2 billion in the coming year on capital investments and exploration. A good portion of that (about $1.9 billion) will go towards its Eagle Ford Shale project. It also has high-potential projects in the North Dakota Bakken and South Texas Eagle Ford. Marathon projects annual average production of 27,500 net barrels of oil equivalent per day or "boed" for 2012 and sees that rising about 30% to 38,000 net boed by 2016. The company recently reported third quarter 2012 adjusted net income of $450 million, or 63 cents per diluted share, which compares favorably to net income in the second quarter of 2012 of $393 million, or 56 cents per diluted share. Marathon shares trades for just a slight premium to book value, which is $25.59. Analysts expect earnings to jump from about $2.62 in 2012 to around $3.20 per share in 2013. That is about 30% in earnings growth and with the shares trading for only about 10 times earnings, this stock could be poised to move higher in 2013.
Key Data Points For Marathon Oil From Yahoo Finance:
- Current Share Price: $30.04
- 52-Week Range: $23.17 to $35.49
- Dividend: 68 cents which provides a yield of 2.2%
- 2012 Earnings Estimate: $2.62 per share
- 2013 Earnings Estimate: $3.20 per share
- P/E Ratio: about 10 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I am long BP.