5 Oil Stocks That Are Starting to Look Cheap

Includes: CRR, CWEI, GEOS, SM, STO
by: Michael Filloon

The recent pullback in many oil exploration and production names has created some fear in the markets. I have gotten a few emails about the pullback as investors wonder if they should take some money out of the oil space. I have done what I always do and that is to keep my long term names in play, while trying to trade the rest. I would like to tell those doing the same that they aren't the only ones losing money. I have been fairly consistent with respect to the oil names I like, and since all have been hit hard, there are very few sheltered from this recent pullback. When looking through names, there are several companies that look very cheap on valuation, and they are the kinds of companies that one could feel alright about owning, even if oil does pull back. Before getting into this list, I want to make clear that the recent pullback is more about things to come then things that are happening now. Some may disagree with me, but OPEC seems to have enough production to carry Libya's load, and although supply and demand just got tighter, the world's oil situation is not dire.

My co-workers are talking all day about the current world market and how it will affect the names we are currently invested in. As I said earlier, there is more going on then just Libya as a reason for oil to trade above $100/barrel. World inflation has affected many things, and food is the main topic. There is a reason that Greenspan and Bernanke always wanted to keep inflation in check, and that is because in the United States when food prices increase we don't buy an Iphone, in third world countries people begin to starve. When people cannot feed their family, they start to get violent. It started with Egypt, then to Libya, and then who is next. If Iran starts to have difficulties oil will skyrocket.

There is a point here, and it is that oil has a much greater chance of going higher, then it does settling back to $80/barrel. Some would say that higher oil prices could lead to other, much more difficult problems such as decreased spending, or increased loan delinquencies. Worries such as these may be a little premature as oil at this level is not devastating to the economy. The recent pullback in energy names could be thought of as an opportunity, as some of the best names have pulled back. Here is a list of some of my favorite oil stocks that are starting to look cheap.

The first name, and probably my favorite is Brigham Exploration (BEXP). Many investors would be turned off by this name based on its PE of 87.18. Before the pullback this stock traded as high as $37.10. Now it is trading at $33.13 up after opening at $30.68. The forward (1yr) PE is trading at 17.44, which is understandable as the 23 analysts covering this stock have earnings growth in 2011 at 88.3%. 2012 earnings growth is estimated to be 68.1%. Brigham has also beat the street estimates by double digit percentages:

March 2010-60%
June 2010-44.4%
September 2010-50%
December 2010-33.3%

I wrote a bullish article on Brigham. On January 10th, Brigham traded at $27.35, and even after the pullback this stock has done well. There are a few reasons I would pick this stock over others in the oil space:

  • 205300 net core acres in the Bakken/Three Forks
  • 51 completed Bakken/Three Forks wells
  • 724 net developed locations
  • Locations could grow to 1209 based on current potential
  • Wells currently payback in 1.2 years
  • This year rigs will grow from 7 to 12
  • Brigham estimates each well to have NPV of $12 million
  • Approximately 132 gross well annual run rate in 12 rig program

Brigham has plenty of locations to drill, and they will be making enough cash to support operations well into the future without needing to cut shares to fund drilling program. Brigham has developed the technology to outperform competitors in the area and consistently, IP rates have significantly outperformed the competition.

This next name is not an oil driller, but they benefit from fracs. CARBO Ceramics (NYSE:CRR) has five main pieces to its business:

  • Ceramic Proppant
  • Fracture/reservoir engineering
  • Fracture design modeling
  • Monitoring systems for bridges, buildings, embankments, etc.
  • Spill prevention control and countermeasures

CARBO is a thinly traded company that derives most of its revenue from unconventional oil and gas drilling. This stock has almost doubled over the past twelve months, and there is nothing to show this will decrease anytime soon. CARBO sells for a PE of 33.82 and a forward PE of 20.83. The 12 analysts covering this stock have it growing 27.1% this year, and 27.8% in 2012. On a percentage basis over the past four quarters CARBO has beaten by:

March 2010-22.4%
June 2010-24.6%
September 2010-11.5%
December 2010-13.9%

On January 21st of this year I wrote an article on CARBO ceramics and a bullish case for this company going forward here. On that date CARBO was trading at $100.79, and now it is above $114. For those who are unfamiliar with ceramic proppant, it is used in fracture fluid pumped down into the well. When proppant is pushed into the fractures of the rock formation it holds those areas open allowing more oil to flow. There are other types of proppant and sand that have been used to accomplish the same thing, but not as well. This company also offer technologies with respect to unconventional wells. It seems all segments are doing well and should continue to for some time.

Clayton Williams Energy (NASDAQ:CWEI) is another way to play this. They have had a remarkable year, and it doesn't look like they are done. I analyzed this company on January 26th of 2011. It currently trades at $29.62 and has a forward PE of $9.44. Analysts estimate Clayton will grow 52.5% in 2011 and 2012 grow another 29.8%. The estimated numbers get very interesting for 2011 and 2012. This is because of the broad difference with respect to earnings from one analyst to another. Now these numbers can differ based on several different variables. It is my guess this difference is with respect to oil pricing. In 2011, 6 analysts cover the stock. The low estimate is $4.95 per share, while the high estimate is $8.48 per share. In 2012, 5 analysts cover the stock with the low estimate being $5.49 and the high being $12.03. For 2012 Clayton does not have any hedges in place for gas. Clayton has some very attractive holdings, including over 188,000 net acres in the Permian and 200,000 net acres in the Giddings area. Over the past 4 quarters Clayton has beaten the street by:

  • March 2010-30.4%
  • June 2010-43.5%
  • September 2010-14.3%
  • December 2010-28.7%

Another company that has been on a tear, is Oyo Geospace (OYOG). I covered this name on February 28th, of this year. This stock was under $50 per share in late August and is trading at $94.84 after a pullback. It has at a PE of 27.92 and a forward PE of 19.6. This may seem expensive to some, but growth estimates show this stock could have some room to run. The four analysts covering this name have 2011 earnings growth at 85%, and 2012 earnings growth at 15.2%. With respect to 2012, there is a fairly large difference of opinion between the analysts. The low estimate of $3.55 per share is much lower then the high estimate of $6.30 per share. If 2012 earnings are closer to the high estimate, Oyo Geospace is cheap on a forward PE basis.

Another interesting metric to consider is Oyo Geospace's growth rate further out. Of current estimates given for this company, the average annual estimated growth rate for this company is 37% a year for the next 5 years. Given the current tightening of supply and demand with respect to oil, it would not surprise me if many of the companies in this space would see increasing backlogs of work. Since much of the new oil wells coming on line will either be unconventional or in deeper areas of the sea/oceans, seismology will be needed not only to find the oil but to get an idea of where the company may need to drill to retreive the resource. Oyo Geospace has not disappointed with respect to earnings over the past four quarters. This company has beaten the street by:

  • March 2010- 18.4%
  • June 2010-72.3%
  • September 2010-32.3%
  • December 2010-23.8%

Another oil exploration and production company that looks to have a bright future is SM Energy (NYSE:SM). I covered this name on February 1st of this year. SM Energy has a very nice inventory with respect to drilling locations. Between the 165000 net acres in the Eagle Ford and the 84000 net acres in the Bakken, SM has a large inventory of drilling locations going forward. SM is trading at a higher PE historically at 23.14. When looking at next year's analyst estimates, there is a large difference for 2012 between the high of $3.37 per share and the low at $1.82 per share. 2011 earnings growth estimates show an increase of 22.6% and 2012 estimates show a growth of 62.5%. 5 year growth estimates annualized show an average growth rate of 27.83%. SM has beaten the Street for 4 straight quarters and beaten by this percentage:

  • March 2010-73.1%
  • June 2010-6.7%
  • September 2010-72.2%
  • December 2010-53.3%

These companies all look well placed for growth this year. Not only are they consistently beating quarterly earnings estimates, they have gotten cheaper on the recent pullback. Look for these names to continue to outperform the broader market.

Disclosure: I am long BEXP.

Additional disclosure: The valuations an earnings numbers in this article were derived from yahoo finance. This article is a general list of stock and is not a buy recommendation. Stock prices can volatile, so I recommend studying the fundamentals before investing in any of these names, as significant losses are possible with any company.