If you haven't done so already, it's time to look at what oil stocks to buy as the U.S. gets ready to become the world's top oil producer. Earlier, the International Energy Agency (IEA) reported that the United States will pass both Russia and Saudi Arabia as the world's top oil producer by 2015. Oil production in the United States will rise from 9.2 million barrels a day in 2012 to 11.6 million in 2020. For Saudi Arabia, that figure is expected to drop from 11.7 million in 2012 to 10.6 million in 2020. Russia will drop from 10.7 million barrels a day in 2012 to 10.4 million in 2020. The recent booms in the Bakken and shale areas are the main drivers for U.S. growth. In this article, I will give an update on oil and gas companies that I recommended back in May 2013 as well as introduce a couple new companies positioned for significant growth as the U.S. takes the top spot.
In most of my articles I like to provide opportunities or options at different price points so investors of different risk/reward tolerances can capitalize on a specific strategy - this article is no different.
EOG Resources Inc. (NYSE: EOG)
Let's start off with the highest priced and one of my favorites, EOG Resources Inc. One of the most attractive aspects of EOG Resources is its position in the Eagle Ford Shale in Texas. The Eagle Ford is one of the most actively drilled targets in North America and is partly responsible for the overall U.S. oil boom. Its 2013 10-k states, "EOG was one of the first companies to recognize the potential of the Eagle Ford Shale and captured what EOG believes to be the best crude oil acreage position within the play." And this is one play that every oil investor should be in.
In 2012, EOG saw oil production in the Eagle Ford Shale alone increase an astonishing 150% to 94.4 million boe from 37.7 million boe in 2011. In addition, the company is also increasing production out of the Bakken formation, specifically in the Parshall Oil Field. For the longest time, EOG has had one short lateral/section in the area of the Parshall oil field. Now, we are starting to see increased activity by EOG in the Parshall area with several new two-well pads popping up. In the image below, the orange dots represent new two-well pads with six other confidential wells, one with a rig already on site.
As if EOG's all-star performance in the Eagle Ford wasn't impressive enough, the fact that they are upping activity in the other top oil producing area in North America is a great sign. If they can have half the success in the Bakken as they've recently had in Texas, this company is in for explosive growth. In the third quarter, EOG posted a year-over-year increase of 39% in its total crude oil production, reported third quarter 2013 net income of $462.5 million compared to third quarter 2012 net income of $355.5 million, and increased the total company growth projection for 2013 to 9% up from the initial 7.5%.
Continental Resources Inc. (NYSE: CLR)
Sticking with the higher priced stocks, I recommended Continental Resources Inc. back in May 2013 as it's the largest leaseholder in the Bakken Field which was described by the U.S. Geological Survey as "the largest continuous crude accumulation it has ever assessed." And Continental Resources owns more than 1.7 million acres of land there. "[The Bakken is] massive, one of the largest pure oil resource plays in the world and we've de-risked 3,800 square miles for multiple benches," CLR's founder Harold Hamm said in a third-quarter earnings call. "It's onshore American, it's 85% oil, and Bakken is one of the most consistent, high quality crudes anywhere in the world."
CLR recently reported its 13th consecutive quarter of production growth up 5% from the previous quarter and 38% from the previous year. In a recent press release, the company showed no plans of breaking the streak as they anticipate boosting 2014 production by 26%-32%. When considering buying Continental Resources it's purely a numbers game and the numbers don't lie. The company had revenue of $1.03 billion for the third quarter 2013, compared to the consensus estimate of $970.67 million. During the same quarter CLR posted earnings per share of $1.61 versus $0.87 in the prior year. The company's quarterly revenue was up 60.1% on a year-over-year basis. In 2012, the company doubled Exxon Mobil's (NYSE: XOM) gross Bakken production while sporting a 40% profit margin. CLR stock is up 17% from my recommendation in May and hit a high of +40%.
Hess Corporation (NYSE: HES)
Although Hess had a more than lackluster third quarter for 2013, this remains one of my top performers from my May recommendations currently up 19%, hitting a high of +21.6%. Hess reported a profit of $420 million, down from $557 million a year prior amid asset sales, extended shutdowns and maintenance. Hess has been shedding assets to fund drilling-and-exploration efforts as it struggles with lackluster profits and shareholder discontent. The company agreed in April to sell its stake in a Russian unit to OAO Lukoil for $1.8 billion. During July, Hess agreed to sell its energy-marketing business for about $1.03 billion to Direct Energy, Centrica PLC's (CNA.LN) North American unit, as part of its plan to exit the downstream business. More recently, Hess agreed sell its East Coast and St. Lucia terminal network to Buckeye Partners L.P. (BPL) for $850 million.
Still, Hess is one of the more aggressive Bakken players having increased production by 87% in 2012, finishing as the third largest producer in the area, and was actually one of the first big Bakken players. I believe a main reason that HES hasn't seen a sharp decline in price following a disappointing third quarter is the fact that they are able to effectively and quickly cut costs. In 2012, Hess cut drilling costs from $13.4 million at the beginning of the year to $9 million to start 2013. The disappointing quarter is certainly something to keep an eye on but Hess remains an attractive way to capitalize on the U.S. oil boom.
Whiting Petroleum Corp. (NYSE: WLL)
Getting into the mid-range price points, Whiting Petroleum may be my favorite U.S. oil play of them all with about 730,000 acres in the Bakken and an F&D cost much lower than the industry average at $19.88/barrel versus $25.88/barrel. WLL has proven reserves of 378.8 million boe, which at $100 a barrel is more than five times its current market cap. WLL is up 21% from my May recommendation and hit a high of +50%.
Over 2013, Whiting sold off significant amounts of its assets that aren't in the Bakken, including its Postle Field enhanced oil recovery assets for $817 million and its acreage in the Delaware Basin for $150 million. Meanwhile, WLL has been using the cash from asset sales and redeploying it into plays that it views as core and higher-return, including the Bakken. For example, in September 2013, the company closed a $260 million acquisition in the Bakken/Williston, including 17,282 net acres with net production of 2,420 barrels of oil equivalent per day in August 2013. Whiting estimates that proved reserves in the area totaled 17.1 million barrels of oil equivalent.
It's important to note that one of the things holding WLL back from a higher valuation has been concern over the amount of wells still left to drill in the Bakken. However, this asset selloff seems like it's being used to fund a greater Bakken production plan. Keep an eye on what the company does with the cash raised from the sold assets.
Halliburton Company (NYSE: HAL)
Halliburton is another mid-range price point company that is doing well following my May recommendation, up 15%, hitting a high of +25.5%. Although third quarter earnings were in line with a slight miss on revenue, I'm encouraged by a piece of news that came out of the recent earnings. Halliburton declared that it bought back roughly 68 million common shares during the quarter, for a total consideration of $3.3 billion. As an investor, I love to see companies conduct share buybacks.
Halliburton is the world's largest user of hydraulic fracking and last year modified the chemical composition of the fracking material which equated to a $400,000 savings per well. However, it is important to note that HAL is an international oil services company and is, therefore, subject to oil market conditions around the globe, not just in the U.S.
Kodiak Oil & Gas Corp. (NYSE: KOG)
Moving on to more volatile, low-priced plays. Kodiak Oil & Gas posted the largest gain of all my May recommendations gaining 57% to its October high. KOG is currently up 22% from my recommendation trading around $11.00 (in 2009, KOG was actually trading at just $0.20 per share). A third quarter earnings release showed revenues of $299.59 million for the quarter, compared to the consensus estimate of $262.29 million, up 167.2% from the same quarter last year. KOG reported $0.12 earnings per share and analysts on average are predicting $0.69 earnings per share for the current fiscal year.
Some activity that has caught my eye is the recent upgrading and raised price targets by several unrelated analysts for KOG. Analysts at SunTrust reiterated a buy rating on shares of Kodiak Oil & Gas Corp. in a research note to investors on Monday, November 4th. They now have a $16.00 price target on the stock. Separately, analysts at Northland Securities raised their price target on shares of Kodiak Oil & Gas Corp. from $10.00 to $14.00 in a research note to investors on Monday, November 4th. They now have a positive rating on the stock. Finally, analysts at Howard Weil raised their price target on shares of Kodiak Oil & Gas Corp. from $14.00 to $18.00 in a research note to investors on Monday, November 4th. They now have a sector outperform rating on the stock. Seven investment analysts have rated the stock with a hold rating and eight have assigned a buy rating to the company's stock. The stock currently has a consensus rating of Buy and an average price target of $14.23.
New Western Energy Inc. (OTCBB: OTCQB:NWTR)
Finally, I round out my recommendations of all sizes with a potential high-risk/high-reward play in New Western Energy Inc. The company has 195 wells in Kansas, Oklahoma and Texas holding potential reserves over 20 million boe. A method of valuing oil and gas companies is the ratio of market capitalization to proven reserves. In a report conducted by Zacks Investment Research, they chose to value New Western Energy at the median value $6.0 per barrel of oil equivalent when comparing similar small oil companies' valuation ratios and figures. Given an estimated reserve of 20.2 million barrels of oil, this implies a market capitalization of $125 million, nearly eight times greater than currently listed.
Over the years the company has purchased (and sold) a number of properties to build a portfolio of oil and gas leases. The current strategy is to build the business through acquisition and partnerships, adding proven reserves, increasing production, and using existing wells to minimize costs. New Western has completed eight acquisitions since 2009. Just two of their wells have already together produced about 190 barrels a day or about $1.5 million a quarter. Another well in Jones County, Texas, has been producing very well for the company all year and has a long history of successful completed drill programs on surrounding leases.
In addition, New Western Energy closed a very positive private placement for a principal amount of $1.5 million. Javan Khazali, President and CEO of New Western Energy Corporation, stated, "We have been working diligently to attract favorable financing from investors who understand the potential upside contained within our asset base. The successful closing of this financing provides the Company with capital to proceed with its oil and gas development programs in Kansas and Oklahoma, as well as the capital necessary to move forward with other low cost high impact projects that we are currently reviewing."
However, things just recently started looking up for New Western Energy. If the history of losses continues it will have negative impacts on the company's ability to achieve its business objectives. The company will need additional funding to expand its drilling program. Without such additional capital New Western Energy will not be able to meet its objectives on sustainable positive net free cash flow.
The goal of this article was to provide a large variety of investors with multiple options at different price points in hopes of capitalizing on the U.S. oil boom. The U.S. is expected to become the number one oil producer in the world in 2015 so the time to start positioning your portfolio is now. With regards to the U.S., I would focus on companies operating in the North Dakota or Bakken area along with those positioned well in Texas or the Eagle-Ford Shale. These two areas have been the driving cause for the surge in U.S. oil and gas production.