Everyone is hoping for a Christmas rally. Many were worried that the US Fed might put the kibosh on that by starting tapering. The Fed did that, but it started its tapering in a very mild way by buying $10B fewer bonds starting in January 2014. That means it will still be buying $75B in bonds per month. On top of that the Fed said that it would not necessarily start raising rates as soon as the US unemployment rate hits 6.5%. Many took this to mean that the Fed will keep its main borrowing rate at 0 to 0.25% well into 2016. At the very least, there does not seem to be any worry that low rates will disappear soon. Almost unnoticed the final US Q3 GDP growth estimate was raised to +4.1%, which is nothing short of stupendous in the backdrop of recent US economic history. The official Chinese PMI for November 2013 came in better than expected at 51.4. The Euro Area December flash composite PMI (52.1) beat expectations. All this (and the many other data points) effectively gave the green light to a Christmas rally.
Oil equities are one of the most cyclical of equities. When the world economy heats up, they usually go up. The better economic performance means the demand for energy will go up. This usually means higher prices and better profits for oil equities. It should especially mean good stock price appreciation for some of the best and fastest growing Bakken stocks. Some of these include: Continental Resources (CLR), Northern Oil and Gas (NOG), and Kodiak Oil & Gas Corp. (KOG). The table below contains a few fundamental fiscal details about each stock.
Price at the close December 20, 2013
Analysts' 1 yr. Target Price
Analysts' Next 5 Years EPS Growth Estimate Per Annum
Analysts' Mean Recommendation
Five Stars (a strong buy)
Four Stars (a buy)
Four Stars (a buy)
Short % of Float
Total Cash (mrq)
Total Debt/Total Capital (mrq)
Quick Ratio (mrq)
Interest Coverage (mrq)
EPS Growth (mrq)
EPS Growth (TTM)
Revenue Growth (mrq)
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Each of these companies is expected to grow relatively quickly. Each of these companies fell significantly as the price of WTI oil fell from a near-term high of approximately $110/barrel to a low of about $92/barrel. WTI prices have since rebounded to about $99/barrel; and these stock prices have rebounded partially with it. These companies should all be good long-term buys if the price of oil does not drop with an extended economic downturn. The recent good to great economic news cited above means the chance of that is less likely. It means each of these stocks is likely to rally in a Christmas rally, which may be helped along by this good news.
Longer term each of these oil companies appears to be a good investment. Each has substantial debt. However, each should be able to pay its debts under circumstances near the current ones. The Current Ratio and the Interest Coverage ratio are indicators of a company's likely ability to pay its bills. NOG appears to be the riskiest in terms of its ability to pay its bills longer term. CLR appears to represent the least risk. The chart of each seems to tell investors how risky each is. The five year chart of each is below.
The five year chart of CLR is below:
The five year chart of KOG is below:
The five year chart of NOG is below:
CLR's fundamentals and chart seem to indicate that it is the safest long-term high growth stock. KOG is a bit less safe, but it has almost twice the analysts' next 5 years' EPS growth estimate per annum of the others. That has to keep the price of the stock going up even with the extra risk. NOG is likely still a good investment, but it represents more risk.
Another factor that investors will want to consider is the amount of hedging each company has. Hedging can limit upside profitability for the short term; but it also limits downside risk for the same period.
CLR has guided for 26% to 32% production growth year over year for FY2014. CLR had 100,684 bopd of oil production in Q3 2013. It had total production of 141,873 boepd in Q3 2013. This is expected to grow as specified above. There are approximately 91 days in a quarter. This puts production at over 9,162,244 barrels of oil (plus further production growth after Q3 2013). The tables below show CLR's hedges for late 2013 and 2014.
As of September 30, 2013, CLR had substantial exposure to oil price declines. However, it had about 78% of Q3 2013 oil production hedged for Q1 2014. Admittedly production will be higher by the time Q1 rolls around; but CLR likely has roughly 70% of its oil production for Q1 2014 hedged already. It also has substantial natural gas hedges. Plus it can be expected to increase its hedges for future quarters as they approach more nearly. Higher near-term oil prices are still good news, especially for the "collar" hedges. Plus the higher near-term oil prices mean that hedges acquired in the future will be at higher prices. CLR looks relatively safe with regard to its hedges and its fiscal stability.
KOG on December 18, 2013 guided for 45% production growth in 2014. It reported approximate average daily production of 30,000 Boe/d for FY2013. A 45% increase in this for FY2014 amounts to about 43,500 Boe/d. KOG currently has oil hedges in place for 26,150 Bopd at an average price of $93.29/barrel for FY2014. Since KOG's reserves are cited as 144.0 MMBoe (86% oil), I will assume for the sake of this article that at least 80% of production will be oil. This means that most of KOG's oil production will be covered by hedges for FY2014. It should be relatively safe. However, its average hedging price for oil is significantly below CLR's. CLR is clearly doing many things better than KOG; and for this reason, it represents a lower risk. Still KOG is forecast to grow more quickly; and if it does not encounter substantial oil price problems, it should do well. The recent better economic news makes strong oil prices likely; and it gives KOG's stock price impetus to go up.
The following Q3E 2013 chart of KOG's oil production growth and the number of rigs it is using gives investors a good idea that KOG is cutting costs, while it is continuing to grow rapidly.
This speaks well of KOG as a potential investment.
NOG averaged about 13,049 boe/d (90% oil) in Q3 2013 or 1,200,520 Boe (1,093,464 barrels of oil production). This was a 20% sequential increase over Q2 2013. Oil and gas sales increased 35% sequentially over Q2 2013. I was not able to find NOG's guidance for FY2014 production. One might guesstimate that production growth will be 20%+ on the year. The table below shows NOG's hedges for FY2014 as of December 2013.
Again 1,093,464 barrels was the oil production figure for Q3 2013. We can use this as an approximate estimate of Q1 2014 production. Actually this amount will be substantially more after you factor in growth in Q4 2013 and Q1 2014. However, on a Q3 2013 basis, NOG will have a large percentage of its production hedged for Q1 2013 with 960,000 barrels hedged. Again these hedges seem to be significantly lower than CLR's. Still they mean that NOG should be a relatively safe bet for investment in 2014.
In sum, CLR is a lower cost developer, which is also in substantially better fiscal shape than the other two companies. It has higher priced oil hedges. In fact it manages to garner Brent prices for many of its hedges. In comparison KOG and NOG are hedging at perhaps below WTI prices. CLR should be a good, safe bet for both a short term and a longer-term investment. It also has 1.2 million net acres of some of the best acreage in the Bakken (and other assets). KOG has a higher forecast growth rate than CLR, but it is smaller at 192,000 net Bakken acres. Still even NOG seems a good investment at 187,000 net Bakken acres.
There are many other things investors will want to look at besides the above cited details. However, people have clearly invested in these companies for years, and the surface indicators show that each should be a good investment for many more years. Plus the recent economic news indicates that they may have good near-term upside potential. None of them seem to be particularly overvalued. All appear to be good buys. Investors with a long-term horizon can feel good about investing in these stocks. Caution is always advisable in investment. Merrill Lynch's MacNeil Curry (among others) is predicting a possible 20%+ US equities price decline in 2014. Investors will want to keep this in mind.
NOTE: Some of the above fundamental fiscal data is from Yahoo Finance and TD Ameritrade.
Good Luck Trading.