5 Battered Oil Stocks to Consider on Further Weakness in Oil

Includes: CWEI, DNR, NOG, OAS, SFY
by: Alex B. Gray

Many oil stocks have been under pressure since April of this year with some suffering dramatic selloffs. The recent decline in oil prices has continued to add pressure to these stocks. Of course, the stocks did come a long way just since late last year so a pullback was certainly not unexpected especially with a decline in oil prices. However, this recent downturn may be creating a long-term opportunity to enter some names that are leveraged to oil production.

Below are energy companies whose holdings offer varying degrees of leverage to oil and natural gas liquids versus natural gas depending on the exposure you desire.

Clayton Williams Energy, Inc. (NASDAQ:CWEI) is led by legendary oil and gas man and the company's namesake Clayton Williams, Jr. Mr. Williams founded the company and has over 50 years experience giving the company a very tested leader. The company's operations are primarily located in Texas, New Mexico and Louisiana. The company made strategic shift to focus primarily on its oil rich properties back in 2009 and that decision has paid off. The company is currently focused on its 198,000 oil rich acres in the Permian Basin which represented approximately 74% of year ended 2010 reserves.

The company also has a large position in the Giddings area which includes the oil rich formations of the Austin Chalk and the Eagle Ford where the company holds 173,000 and 168,000 net acres respectively. In addition, the company announced in March of this year that it struck a deal with Chesapeake (NYSE:CHK) to earn a 75% interest in 75,000 acres of Chesapeake's acreage located in the Delaware Basin of West Texas.

The company reported a $7.9 million dollar loss in the first quarter of 2011 primarily due to a $46.3 million loss on derivatives of which $44.6 million was non-cash. The company also suffered from increased cost of field services which has put additional pressure on the stock. Despite these issues, operating income more than doubled to $44 million prompted by a 20% increase in oil production to 9,989 barrel per day. Natural gas production slipped 37% due to the companies focus on its oil properties.

The stock price has been on a slide since peaking at nearly $110 per share in April and is down approximately 46%.

Denbury Resources, Inc. (NYSE:DNR) is primarily focused on enhanced oil recovery or EOR through the use of CO2. The company's acreage, which totals nearly 1 million net acres, is primarily located in the Gulf Coast region and the Rocky Mountain region of the United States. Of this acreage, approximately 266,000 net acres are located in the Bakken. In addition, the company controls a major CO2 source in Mississippi and 846 miles of CO2 pipeline which help supply the company's EOR activities. The company is looking to be a major player in the Bakken with a capital budget of $400 million, which is just shy of its $475 million EOR budget. At the end of 2010, 85% of the company's proven reserves were oil.

Like Clayton Williams, Denbury recorded major non-cash derivative losses in the first quarter of 2011 to the tune of $172.3 million resulting in a net loss of $14.2 million. If you eliminate unusual and non-cash items, the company earned $103.9 million in the first quarter compared to only $17.4 million in the first quarter of 2010. The company's production also increased during the first quarter, but comparables were made difficult due to the acquisition of Encore along with the divestiture of non-strategic Encore properties. According to the company, production increased 3,913 BOE/d or 7% on a pro forma basis when adjusting the first quarter 2010 continuing production to include a full quarter of production for the retained Encore properties.

The stock price of Denbury Resources is down approximately 27% from its 52-week high.

Swift Energy Company (NYSE:SFY) primarily operates in South Texas, Central Louisiana/East Texas and southern Louisiana. In South Texas, the company owns rights to 73,764 undeveloped acres in the Eagle Ford and 65,466 in the Olmos sand formations much of which overlaps the Eagle Ford. The company has approximately 55,530 net acres comprising of multiple fields in southern Louisiana and rights to 164,940 net acres in Central Louisiana/East Texas with an additional 35,000 unleased fee mineral acres in the Master Creek field located in Louisiana. The company's reserves in South Texas are predominantly natural gas while its East Texas and Louisiana properties have higher reserves of oil and natural gas liquids. At the end of 2010, the company's reserves were 47% oil and natural gas liquids.

Swift saw its first quarter 2011 earnings increase 42% to $20.2 million while revenues increased 31% to $144.1 million. The company increased production 29% in the quarter to 2.65 MMBoe when compared to the same period in 2010 as a result of increased activity in South Texas as the company continued to focus resources on its liquids rich acreage in this area. In addition, oil and natural gas liquids accounted for 50% of total production in the first quarter.

The stock price of Swift Energy is down approximately 30% from its 52-week high.

Oasis Petroleum (NYSE:OAS) is a pure play on the Williston Basin in North Dakota and Montana with 303,231 net leasehold acres. The company began its exposure to the Williston Basin with the acquisition of 175,000 net leasehold acres in June 2007. The company made subsequent acquisitions in 2008, 2009 and most recently in the fourth quarter of 2010. The company has a $441 million drilling budget for 2011 of which 83% will target its West Williston project and 12% and 5% will go toward the East Nesson and Sanish projects respectively.

For the first quarter of 2011, the company saw revenues soar 192% to $58.7 million and adjusted EBITDA jumped 254% to $41.1 million which was primarily the result of a 146% increase in average daily production to 8090 Boe/d. However the company showed a net loss of $6.8 million on the back of an unrealized loss on derivatives of $31.2 million. Production for the first quarter was comprised of 95% oil.

The stock price of Oasis Petroleum is down approximately 27% from its 52-week high.

Northern Oil and Gas, Inc. (NYSEMKT:NOG) is another pure play on the Williston Basin concentrating on the Bakken, Three Forks and Red River plays. The company's leaseholds currently cover 147,407 net acres in the Williston Basin and a minor 7,950 net acreage position in the Finger Lakes region of New York. The company acts as a non-operator and partners with high-quality operators such as EOG Resources (NYSE:EOG), Continental Resources (NYSE:CLR), Hess Corp. (NYSE:HES), Marathon Oil (NYSE:MRO) and Brigham Exploration (BEXP). The company's drilling budget for 2011 is $252 million and management is currently guiding for average production to rise to 6,500 - 7,100 Boe/d.

The company saw oil and gas sales increase 223% to over $27 million on a 185% increase in production to 356,622 Boe. Like many other energy company's Northern reported a net loss for the quarter due primarily to unrealized losses on derivatives. Excluding this unrealized loss the company had net income of $5.9 million or $0.09 per diluted share. The company finished the first quarter with production of 5,413 Boe/d of which 94% was oil. In addition the company announced a $150 million stock buyback plan which would represent approximately 13% of the outstanding shares at today's share price.

The stock price of Northern Oil and Gas is down approximately 46% from its 52-week high.


It is important that you do your own research on these companies and find one that meets your required comfort zone. For instance, I regard Northern Oil and Gas as the high-risk play among the group due to some negative attention it has recently received which is yet to be fully sorted out. For more on potential issues with NOG, you can start by reading Northern Oil & Gas: Putting a Pretty Face on an Ugly Deal?

However, depending on where this finally lands the stock and the outcome of the questions being put forth, it could offer an interesting risk/reward situation. In addition, drought concerns may be adding additional pressures to companies with a large percentage of their drilling programs in Texas due to the high usage of water. This may be especially attractive as mother nature is good at providing great entry points for investors.

Lastly, you can find other players in the field with oil rich holdings such as Whiting Petroleum Corp. (NYSE:WLL), Continental Resources, Inc. (CLR) and Brigham Exploration Company (BEXP) that are certainly worth a closer look.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CWEI, DNR over the next 72 hours.