2 Oil Stocks That Will Shine Your Portfolio In 2013

Includes: APA, EOG, XOM
by: Fusion Research

After a long time, America's oil production has reached its true potential, crossing the production mark of 7 million barrels/day. The expectation is building up for the industry to boom in the future as well. In this article, I have analyzed three stocks from the oil and gas industry on the basis of their earnings and future growth prospects.

Apache (NYSE:APA): Shaky performance in the short term

After posting low full-year adjusted earnings of $9.48/share, as compared to last year's earnings of $11.83, the stock price of Apache sunk. The guidance of weak first-quarter production and 3%-5% anticipated growth for the full year accompanied the low earnings data release.

Going forward, recent cyclones in Australia will also lead to production downtime for Apache, prompting expectations of a weak first quarter of 2013. Apart from that, the production for the entire year from the region is expected to drop by double digits because of natural declines in Apache's oilfields' reserves.

The company's capex guidance for 2013 fell to around $10.5 billion. One-fifth of this will be used for long-term growth in Egypt and Australia, which will not contribute anything until 2014. I think the total spending for a growth rate of 3%-5% seems a bit aggressive, especially when the previous guidance was 6%-9%.

In order to neutralize the future ill-effects of low production guidance, the company has announced the divestiture in low priority assets, which are worth $2 billion. This planned selling is more than the total assets sold in the last 10 years. The idea is to use the proceeds to repay its debt and trim down the balance sheet.

Though, the asset restructuring initiative should be able to offset some downside, but the short-term outlook of the company seems to be a bit shaky. This stock requires some patience, until more information regarding the asset sale is obtained. I am neutral for Apache.

Exxon Mobil Corporation (NYSE:XOM) - A mixed bag with better prospects

The earnings of Exxon for the last quarter of 2012 came ahead of the consensus expectation by around 10%. The total adjusted earnings of the company stood at $9.95 billion for the quarter. On a closer look, I observed that the average production per day of the upstream segment was below expectation. This is a matter that requires deeper attention, as two-third of Exxon's earnings comes from this segment. Even though the average production was sequentially up by 8%, it still lagged behind last year's performance.

Meanwhile, the weakness in production in the upstream segment is somewhat offset by the strength of its downstream business. Although, this segment's contribution to the total earnings is relatively less than that of upstream, its growth rate is really good. Under downstream; it's Refining and Marketing segments posted a huge 316% year-over-year increase in the profit, mainly because of strong margins. I expect the future increment in this segment to offset the low average production from the upstream segment.

Recently, a fraud case was dismissed against Exxon in Maryland's highest court. Before dismissal, Exxon was held guilty by the Jury of Baltimore County regarding a gas leak in the area. The dismissal has resulted in a reduction of future liability of about $1.65 billion. The company can use the amount saved in the $5 billion share buyback planned in the first quarter.

The weak average production is something to worry about, but with the growing downstream segment the company's position in the future will be stable. Moreover, the company has additional funds which can be utilized for share buybacks. I'll recommend a Buy for Exxon.

EOG Resources Incorporated (NYSE:EOG) - The booming Eagle Ford

In the fourth quarter, EOG incurred a loss of $505 million because its few assets were written down. Excluding the impairment charges, the company had decent earnings, which were around 19% above the consensus estimate. For full-year 2012, the company's production increased by 10% year-over-year. The increase in production was a result of high volumes in crude oil and condensed products.

In addition to this, the company sees Eagle Ford as the reason for its future growth in production. Last year, it increased the potential reserve in the region to about 2.2 billion barrels of oil equivalent. The performance of the region in December, 2012 was above-expectation, as the production increased by 68% year-over-year. Looking at this, I am optimistic about this region's performance in the future as well. It is to be noted that every increase of 1% in Eagle Ford's performance means approximately an additional 280 million barrels to the company.

Additionally, the volatility in the oil price makes it hard to predict the future cash flows. To mitigate the risk of loss due to any fall in prices, the company has hedged around 49% of its production for 2013. For the first half of the year, it has hedged the prices over $99 per barrel while for the next half it's around $98.

Though the risk of volatility still remains, the hedged position and potential reserves in Eagle Ford should help the company mitigate the risk. The stock for me is a Buy.

What's in it for investors?

The strong performance of its downstream business and additional availability of cash in hand; strengthens my faith in Exxon to grow in future as well as fund the buyback in first-quarter of 2013. However, I do have some concerns regarding the decline in volumes.

As for EOG, it has increased the reserves in Eagle Ford and I feel that the region's past performance should continue in the future as well. Along with that, the hedged position gives clarity to the future cash flows of the company.

On the other hand, I am not very optimistic about Apache. Downtime in Australia and large capex investment for a relatively low growth rate of 3-5% makes me unsure about this stock. I'll remain Neutral on the stock until more information on the asset sale plan is obtained.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.