Why I'm Selling Oil Stocks

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Includes: APC, CAM, EOG, HAL, NOV, RRC, SLB
by: Rougemont
Almost all energy related stocks have seen large gains lately, as oil has surged about 25% in the last several weeks. There is enough supply of oil, so the only reason I believe the price of oil has risen so much is due to a risk premium caused by tensions in the Middle East and Africa.
I don't believe this risk premium can last forever, and I also don't think our economy is able to handle oil at $108-plus per barrel or the price of gas at over $4 per gallon. I believe we will start seeing signs of demand destruction in the coming weeks and months. Many consumers are already thinking twice about driving when it can cost around $100 to fill a sedan with gas. In 2008, when the housing bubble was still in force, emerging market demand for energy seemed insatiable, and speculators were actively pushing oil higher, we saw oil go to about $140 per barrel. Even with a global economy that was booming, we saw rapid signs of demand destruction as the high price of oil began to choke the economic boom.
Today, we have a much weaker economy. If you want to call this a recovery, it's one of the weakest in history. There are major areas of weakness in the U.S. economy, and real estate remains an anchor and a risk to our economy. To summarize why I think most big name oil stock won't go higher for now:
  1. The risk premium in oil has expanded to unsustainable levels. The current conflicts will end and when they do oil will drop.
  2. I believe oil prices are at the tipping point where we could begin seeing significant demand destruction. Even if the Middle East conflict is prolonged, people and businesses will cut back and lower demand will result in lower prices.
  3. Many big name energy stocks are overbought and do not provide the best value in the market.
I think exposure to oil is a must for investors in the long run. In the short term, it has been paying off to buy the dips in energy stocks when they occur. Right now I believe it's a great time to take profits in many energy names. I won't be surprised if oil dips back under $100 at some point and that could provide a much better buying opportunity in the energy sector. If you seek value, it makes sense to sell energy stocks which are trading near their highs and for 20 to 30 times earnings and replace them with tech stocks and other out of favor companies like Merck (NYSE:MRK) selling for only 8 to 10 times earnings. My strong belief is that the easy money has been made in these names. A correction could be painful in these stocks and it's time to rotate into cheaper sectors. Here are some stocks you might want to consider selling now:
EOG Resources, Inc., (NYSE:EOG) shares are trading at $118.19. The RSI is about 67, which is around overbought levels. EOG is an independent oil and gas company based in Texas. These shares have traded in a range between $85.42 to $121.44 in the past 52 weeks. The 50 day moving average is $108.96, and the 200 day moving average is $98.71. Since EOG shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be due for a drop. Earnings estimates for EOG are just $3.42 per share in 2011, so the PE ratio is over 30. These shares appear ripe for a correction and the stock was downgraded recently by Ticonderoga which you can see here. EOG pays a small dividend of only 64 cents per share which gives a yield of .5%.
Schlumberger (NYSE:SLB) is trading at $92.97 today. SLB is one of the leading oil equipment and service companies. These shares have traded in a range between $51.67 to $95.64 in the past 52 weeks. The 50 day moving average is $89.80 and the 200 day moving average is $72.92. Since SLB shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be due for a correction. Earnings estimates for SLB are just $3.84 per share in 2011, so the PE ratio is over 23. The book value is about $22.94. These shares appear overvalued. SLB pays a small dividend of $1 per share which gives a yield of 1.1%.
Cameron International (NYSE:CAM) is trading at $57.07 today. CAM is one of the leading oil equipment and service companies. These shares have traded in a range between $31.42 to $63.16 in the past 52 weeks. The 50 day moving average is $57.90 and the 200 day moving average is $46.55. Earnings estimates for CAM are just $2.76 per share in 2011, so the PE ratio is over 20. The book value is about $18.01. CAM does not pay a dividend. With a PE ratio of over 20, shares near the high end of the trading range and no dividend, I just don't see any reason to hold or buy these shares now.
Halliburton (NYSE:HAL) is trading at $49.69 today. HAL is one of the leading oil equipment and service companies. The shares have traded in a range between $21.10 to $50.74 in the past 52 weeks. The 50 day moving average is $45.99 and the 200 day moving average is $36.46. These shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week highs. Earnings estimates for HAL are at $2.88 per share in 2011, so the PE ratio is about 20. The book value is about $11.40. HAL pays a small dividend of 36 cents per share which gives a yield of .7%. With a PE ratio of nearly 20, shares near the high end of the trading range and only a small dividend, I just don't see much value here.

Anadarko Petroleum (NYSE:APC) is trading at $82.82 today. APC is one of the leading oil and gas companies, and is based in Texas. The shares have traded in a range between $34.54 to $84 in the past 52 weeks. The 50 day moving average is $79.25 and the 200 day moving average is $63.48. Since the shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be due for a correction. Earnings estimates for APC are at $2.57 per share in 2011, so the PE ratio is about 32. The book value is about $41.70. APC pays a small dividend of 36 cents per share which gives a yield of .4%. With a PE ratio of about 32, shares near the high end of the trading range and only a small dividend, I just don't see much value left. The time to buy these shares was when they were trading for less than $40 per share, so now is a great time for taking profits.

National Oilwell Varco (NYSE:NOV) is trading at $81 today. NOV is an independent oil and gas company based in Texas. These shares have traded in a range between $32.18 to $82.80 in the past 52 weeks. The 50 day moving average is $77.84 and the 200 day moving average is $56.45. Since NOV shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be due for a correction. Earnings estimates for NOV are at $4.15 per share in 2011, so the PE ratio is about 20. The book value is about $37.30. NOV pays a small dividend of 44 cents per share which gives a yield of .5%. While this company is not as overvalued as some of the other names here, it is still a case where the easy money has probably been made.

Range Resources (NYSE:RRC) is trading at $58.79 today. RRC is a oil and gas company, based in Texas. These shares have traded in a range between $32.25 to $59.43 in the past 52 weeks. The 50 day moving average is $51.27 and the 200 day moving average is $42.75. Since RRC shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be due for a correction. Earnings estimates for RRC are just $1.01 per share in 2011, so the PE ratio is over 50. The book value is about $13.06. These shares appear extremely overvalued on every metric. RRC pays a small dividend of 16 cents per share which gives a yield of only .3%. These shares looked priced beyond perfection and I would sell, sell, sell ...

The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. This information is solely educational in nature and not intended to serve as the basis for any investment decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.