Even though the stock market has been experiencing a major rally, there are still pockets of value to be found. One area that has not seen as much in the way of gains is the oil sector. Part of this can be explained by the recent strength in the U.S. dollar, relative to other major currencies like the Japanese yen and the euro, etc. When the U.S. dollar is strong, it can limit gains in oil. Another factor has been the supply of oil in the U.S. which, due to production and a still weak economy has not been as tight as oil bulls would like. However, the dollar is not going to the moon and even if rising production keeps a lid on oil for awhile, that is not likely to last if the strength in the housing and stock market continues. Rising home values and stock prices are likely to create a "wealth effect" and increase consumer confidence and spending. This wealth effect could trickle throughout the economy in the coming months.
There are a number of short-term and long-term catalysts for oil and it should be noted that even with dollar strength and adequate oil supplies in the U.S., the price of oil has been fairly strong as it remains solidly above $90 per barrel. This is a level that is highly profitable for many oil companies. Investors should also consider that the tensions in the Middle East could easily ignite oil prices in the short term. Also, with Memorial Day Weekend coming up, the Summer driving season is about to start and that should help to reduce inventories and support the price of oil. In the long run, global growth and rising incomes in emerging market countries are likely to create a secular bull market in oil. That is why investors should consider buying this sector especially as it has not fully participated in the recent market rally. Here are some cheap oil stocks to consider buying now:
FieldPoint Petroleum Corporation (NYSEMKT:FPP) is an independent oil and gas company that is focused on exploration and production. It has ownership interests in approximately 304 wells, which are located in Oklahoma, Louisiana, New Mexico, Texas, and Wyoming. FieldPoint plans to continue expanding in Texas, Wyoming, Montana, North Dakota, and Oklahoma. The company has some high-potential projects including a partnership with Cimarex Energy (NYSE:XEC) at the "Bone Spring" play in Lea County, New Mexico. The company has issued a statement on this project, which reads:
This horizontal well project was originally announced in 2010, and produced the first well in December 2011. If the results hold, we are extremely excited about the prospects of drilling a third well on this property. Our partner, Cimarex Energy is one of the best in the industry at completing wells in the Bone Spring formation.
The company has an experienced management team, which is led by Ray D. Reaves who is Chairman, and CEO. He began his career in the oil industry in 1987, at North American Oil and Gas. In 1998, Bass Petroleum merged with Energy Production Corporation, which resulted in the formation of FieldPoint Petroleum Corporation. The company also has some notable directors including Debra Funderburg, who has served as director since 2006. Since August 2010, she has also served as Vice President of Reservoir Engineering for Magnum Hunter Resources Corp. (MHR) and has served at a number of other companies in the oil sector including Pennzoil as Senior Petroleum Engineer.
FieldPoint recently announced solid financial results. For the first quarter of 2013, it earned $543,509 or 7 cents per share. The company also reported profits in 2012 and this is significant because many companies at this stage are still reporting significant losses. FieldPoint's profitability and partnership deal with Cimarex reduces risks for investors.
In 2012, the company completed two wells in Lea County, New Mexico, which boosted revenues and it plans to drill a third well in the same field. The company said this well "could also contribute significantly to our long-term goal of increasing both reserves and production. We anticipate that this New Mexico project will have a very positive impact on 2013." It could also benefit from plans to drill at the "Riverdale Prospect" in the Wilcox Formation where it holds a 10% working interest as early as mid-2013. The company has stakes in many producing wells and here are a couple of highlights, although the company website will give a more complete list:
Apache Field, Caddo County, Oklahoma is a waterflood project producing from the Viola/Bromide formation. The Apache Bromide Unit is located approximately 5 miles west of the town of Apache and 25 miles north of Lawton, Oklahoma. The Company has a 25.23% working interest in the unit which consists of 11 producing oil wells and nine water injection wells.
West Allen Field, Pontotoc County, Oklahoma is a producing oil and natural gas field located approximately 100 miles south of Oklahoma City, Oklahoma. The Company has a working interest in 52 leases or a total of 224 wells, the leases have multiple wellbores and the Company has plans to participate in the future recompletion of behind pipe zones.
FieldPoint currently trades for just about $4 per share and if the new wells perform and other growth plans proceed, this stock could have significant upside. While there are always downside risks with an oil exploration and production company, these risks appear to be mitigated by the partnership agreement with Cimarex Energy, with experienced management that is invested in this stock. Insiders own about 40% of the company and that is likely to keep them aligned with shareholders. The CEO, Ray Reaves alone owns over 3 million FieldPoint shares and that stake is worth around $12 million.
I think the value of the partnership agreement with Cimarex is underestimated by the market at this time and it could soon become an upside catalyst. Under this agreement, drilling is set to begin the first week of July. Cimarex is a major oil company with a market capitalization of about $6 billion and revenues of roughly $1.6 billion, so it must be seeing significant potential in FieldPoint and these partnership wells. For a project to "move the needle" and be worth the time and investment for a company of its size, Cimarex has to be seeing high potential here. More information about the partnership is detailed in a recent article titled "Cimarex to Focus on New Mexico," which is impressive as this indicates serious interest In FieldPoint's New Mexico projects. Considering the partnership and drilling potential here, it might be sensible and even more cost-effective for Cimarex to buy FieldPoint at some point in the future.
Statoil ASA, (NYSE:STO) is a leading oil and gas company based in Norway. These shares appear undervalued thanks to a recent pullback. While many U.S.-based investors tend to focus on companies like Exxon Mobil (NYSE:XOM), getting to know this Norwegian oil company could reward investors with an above-average dividend yield and potential upside from capital appreciation.
Statoil has made a couple of major discoveries in the past year or so. It has significant growth potential for many years due to a very major oil and gas discovery that it made in the Barents Sea last year. Statoil is a 50% partner in this project and the estimated oil reserves is potentially over 500 million barrels. Statoil plans to do additional drilling in the area, so the reserves could continue to grow. According to data from Yahoo Finance, Statoil already has very significant reserves: Statoil had proved reserves of approximately 5,422 million barrels of oil equivalent. It also operates over 2,200 fuel stations.
One issue that seems to have put a little pressure on this stock is the recent investigation of a number of oil companies over potential price-fixing or manipulation. BP, Statoil and other companies could be hit with sanctions or fines from the European Commission. However, this downside risk seems limited since nothing has been determined in a final manner yet. Plus, if there are any fines, the amounts are not likely to be material to these companies anyhow. Of course, a significant drop in the price of oil would be another major downside risk, but with the global economy starting to show signs of improvement, it seems that oil prices are more likely to rise over time, rather than decline.
Statoil has a strong balance sheet that is very conservative when compared with many other oil companies. It has about $15 billion in cash and around $20.56 billion in debt. That debt level is low considering the cash balance and the fact that this company has annual revenues of nearly $120 billion. Analysts expect Statoil to earn about $2.81 per share in 2013. This puts the price-to-earnings ratio at about 8.5 times earnings, which appears cheap when considering that some popular U.S. based oil companies like Exxon Mobil trade for about 11 times earnings. Also, Statoil pays a dividend that yields nearly 4%, which is considerably higher than Exxon's 2.7% yield.
Statoil did rally up to about $26 per share earlier this year, but a recent pullback has created a buying opportunity, with the stock now at just around $22.50. This stock now offers a generous dividend, a low price-to-earnings ratio, and growth potential, which makes it too cheap to ignore.
Kodiak Oil & Gas Corp. (NYSE:KOG) has oil and gas projects in the Bakken Range, Williston and Green River Basins, in the U.S. Rocky Mountains. This company is profitable and it is growing at a rapid pace, which gives the stock significant long-term upside.
This company has been reporting solid financial results and very strong revenue and production growth. For the first quarter of 2013, Kodiak achieved oil and gas sales of $165.1 million, which is an increase of 107%, when compared with $79.9 million during the same period in 2012. These first-quarter results were also 26% above the fourth-quarter results for 2012.
In terms of production, Kodiak reported an overall 103% increase in quarter-over-quarter equivalent production volumes with 1.95 million barrels of oil equivalent (MMBOE) sold, or an average of 21,700 BOE per day (BOE/d) during the first quarter 2013. This compares favorably with an average of 10,578 BOE/d in the same period in 2012. Furthermore, oil accounted for roughly 94% of sales during first-quarter 2013. This resulted in net income of $19.4 million, or 7 cents per diluted share. By comparison, in the same period for 2012, it achieved net income of $1.7 million, or 1 cent per diluted share.
Fast growth can become a downside risk if the growth is not properly managed but so far, Kodiak has been successfully facing these and other challenges. This risk can be exacerbated when there is leverage in the balance sheet so that is another potential downside factor to consider. Kodiak has about $6.59 million in cash and around $118.58 million in debt. However, considering the rate of growth this company is experiencing that debt could be increasingly diminished as revenues and profits expand in the coming years.
Some view Kodiak as a potential takeover target as it has prime assets in the highly-coveted Bakken Range. Another Seeking Alpha article points out that recent deals in the oil sector could imply a value of roughly $19 per share for Kodiak. Whether or not there is a deal, Kodiak appears well positioned to benefit from the oil boom in the Bakken. Earnings estimates are at 70 cents for 2013 and about $1 for 2014. That makes this stock look cheap since the company is growing so rapidly and only trading for about 8 times next year's earnings estimates.
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclosure: I am long STO, FPP. 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.
Disclaimer: Please consult a financial advisor before making investments.