By Scott A. Mathews
Events in Libya are having two effects for stocks: Those with Libyan exposure risk selling pressure while those with exposure to the broader market will likely be buoyed by a spike in oil prices resulting from Libyan turmoil. Below, we have grouped stocks based on this exposure. Those with Libyan exposure are facing the possibility of panic selling, which could make them attractive buys in the near future. Those without significant exposure to Libya are likely to experience a run-up in value as Libya tips the scale on oil price acceleration. These latter names have also been screened for the geo-political insulation, security and diversification of their operations.
Oil, while up to a 2-year high hasn’t started to climb as aggressively as it could. Libya, the 17th largest producer of oil, shipping 1.8 million barrels a day, and an OPEC member is coming apart at the seams. Likely hundreds have been killed as Libya breaks out in full-on civil war with the military changing allegiances, Libya’s UN diplomats denouncing Gaddafi, and tribal divisions, which are the seams of the country’s stability, renouncing their allegiances to the notorious terrorist cum dictator.
Below find some strong oil names insulated from the Middle East or well-diversified so that they could see a spike in their prices soon. Prior to those names, take a look at the companies with higher Libyan exposure in order to find names that might be irrationally oversold and present attractive buy opportunities in the future. For two other names we recently investigated, see our article from last week here.
Libyan Exposure Names
Eni SpA (NYSE:E) Eni is known for its brash opportunism in regions of political instability. This is one of the companies with the most exposure to Libya and this has been reflected in its stock price in recent days. The fortunes of its stock price are largely tied to its success in accessing oil fields mired in political instability and also floats in relative line with the strength of the European economy. It is likely going to take a beating in the coming months depending on how events turn in Libya. Investors with a risk-reward appetite similar to that of Eni may do well to keep an eye on the stock price to enact their own opportunistic strategies.
Statoil (NYSE:STO) With a very strong presence on its home turf, the Norwegian state oil company remains relatively isolated from political risk. As costs of extraction increase on the Norwegian Continental Shelf, Statoil has sought to diversify its extraction further afield. Its exposure has brought it increased profitability and while exposure in Libya is a minimal part of its extraction portfolio, it could now suffer from its ventures in politically sensitive areas. The behavior of investors vis-à-vis the Libyan situation will determine how it plays out for Statoil in the short run. With 5-year EPS estimated at 4%, however, it remains a stable competitor.
Royal Dutch Shell (NYSE:RDS.A) With a production capacity of nearly 3.6 million barrels a day, nearly twice that of all of Libya’s daily output, the real effect of Libyan instability should be mitigated. However, that doesn’t mean it won’t hit the stock in the very short term. RDS.A is one of the top 5 largest players, so expect diversification to mean that as oil prices rise, this master of the game could position itself well.
Halliburton (NYSE:HAL) This major name has capitalized on a strategy promoting integrated services that has edged out much competition and secured its dominance of the North American drilling services and equipment business. Now management is aiming to export this strategy to Asia and the Middle East. With its CEO now based in the Middle East Halliburton has secured some major contracts. These new foreign contracts have placed it in Libya amongst other politically sensitive areas. It has taken a price hit today, but remains a strong company with a proven strategy. Keep an eye on the price to see if it aligns with your portfolio calculations.
Names Insulated from Libya
Continental Resources (NYSE:CLR) Operating on the Bakken Shelf in the vicinity of the Dakotas, you couldn’t find much better political insulation. With oil accounting for more than 70% of production (natural gas being the other component) it is positioned to get a secure boost if oil prices continue their ascent. In the realm of 5-year predictions, Continental is looking at a healthy 20% growth in EPS.
Cenovus Energy (NYSE:CVE) This Canadian name has operations in the Alberta Oil Sands. This price sensitive extraction, where $70-80/barrel becomes a break-even point, gains the stock a lot of positive upward momentum as oil prices rise significantly above this point. With oil nearing $100/barrel and further political instability likely to spike it higher, the technical extraction exposure of Cenovus coupled with its secure geographic position should position it to benefit.
Penn West Energy Trust (NYSE:PWE) Another Canadian name means more stability in revenue streams during these heady times in the Middle East. With a focus on horizontal drilling to maximize extraction from mature fields and a second push in their strategy exploring new plays in North America, Penn West is a steady name. If oil prices continue to rise, Penn West could break through its 52-week band, near where it is trading today.
Petroleo Brasileiro (NYSE:PBR) This massive Brazilian producer has been boosted recently by the major discovery of reserves off the Brazilian coast. This type of extraction is more costly than traditional extraction, so, as prices for oil rise, the justification and margins on this type of extraction grow. Libyan instability leads to spike in oil prices which leads to increased value of PetroBras’s reserves. That said, this type of extraction is also known for its long-term nature. That means that investors are aware that the benefits of the reserves will be elongated over a period of time so momentary shakes to the oil market can have less of an effect on the stock. This is a double-edged sword.
Schlumberger (NYSE:SLB) This global oil services company with roots in France and HQ in Houston has a diversified global portfolio of activity. Known for R&D, Schlumberger needs to successfully commercialize this work in order to maintain its strength. EPS projections for this year are nearly 30%. A bevy of investment banks, including Deutsche Bank (NYSE:DB) and Barclays (NYSE:BCS), have all set price targets for Schlumberger in the vicinity of $100.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.