At the beginning of last week, the United States market was hopeful that a cut in federal spending and an increase in the debt limit would push the market higher. This turned to fear as economic numbers were poor. Basically, we were able to raise the debt limit, decrease government spending, and experienced a GDP revision (plus other poor economic indicators). This revision increased worries that inflation was going to outpace GDP . Finally, the week ended with a good jobs number. On Friday, the S&P 500 held support at 1168 and finished the day at 1199. Friday afternoon, Standard and Poor's announced it was downgrading U.S. debt. Shortly after, we heard that the ratings agency had made a $2 trillion mistake. This created the assumption the downgrade would be lifted, but finally the downgrade was confirmed. It is difficult to assess company values, as this was the first downgrade since the AAA rating was given to U.S. debt.
Commodities were hit especially hard, as the fear of recession and decreased demand pushed prices downward. Commodities are also seeing pressure from strength in the dollar versus the euro. It seems Europe's financial situation is worse than recently expected. We do not know what will happen next, so making a list of stocks that are getting cheaper should be a priority. There are some very good growth plays that are beginning to look to have value.
I am still bullish the oil space for several reasons. The first is oil exploration and production companies with a very large portion of production hedged. The same reason these stocks took a beating in the first quarter will be a reason to maintain positions in the oil space. Oil service companies are insulated from a sharp downward move in the price of oil and may not be a bad place to hide out until the market improves. Companies that provide drilling services or build rigs are not levered to oil, and should be insulated. The last group has been beaten up, but may have some room to the upside. These refiners would be punished in a significant downturn, but I believe their continued exposure to the wide margin between the price of WTI and Brent will continue to drive earnings.
HollyFrontier Corp. (HFC) is up 144% over the past 52 weeks. This company is well run and its five refineries are levered to U.S. and Canadian oil. This decreases costs substantially through lower cost feedstock. All of its refineries are located in mid-continent, Rocky Mountain and Southwest markets. It has a total capacity of 443000 bpd. Thirty-two percent of its crude slate is sour/intermediate. Its 12.1 complexity provides operating flexibility. HollyFrontier's low debt and the highest net income per barrel. The seven analysts covering this company estimate this year's growth to be 380%. It has a forward PE of 7.82. In summary, HollyFrontier was created through a merger earlier this year. It combined, in my opinion, the two best positioned refiners in the United States.
Cabot Oil and Gas (COG) is up 106% over the past 52 weeks. The second quarter of 2011 was good for Cabot. EPS came in at 41 cents, well ahead of the estimate of 27 cents. Production estimates were increased by 5%. The main reason to be bullish this name is its 200,000 net acres in the Marcellus. This play has a 100% rate of return. Cabot has 60,000 net acres in the Eagle Ford oil window. Twenty-five net wells will be drilled in 2011 by Cabot. Cabot is a play on liquids and it has done a very good job of increasing this production. This company may be a little pricey at 24 times forward earnings, but analyst estimates have Cabot growing 43% this year. In summary, Cabot has done a very good job with its Marcellus play. This play does not get the exposure that the Bakken does, but it should.
EV Energy Partners (EVEP) is up 68% over the past year. This MLP also has a 4.9% dividend. It has approximately 16700 wells and proved reserves of 817.3 Bcfe. EV Energy has increased proved reserves at a CAGR of 30% since 2006. EV Energy has over 600000 gross acres in Ohio and 150000 net acres in the Utica shale. Its relationship with Chesapeake is helping to accelerate the learning curve. It has over one million acres in the Chalk and is the number one producer. EV Energy has been a disciplined acquirer of acreage, and will continue to be into the future. Analysts estimate it will grow 32% this year. It trades for 21 times forward earnings.
Patterson-UTI Energy (PTEN) is up 66% over the past 52 weeks. This company operates as a contract driller that develops and sells land rigs. Its new APEX walking rig is a highly efficient and mobile rig system that reduces downtime in moving from one location to the next. Several of Patterson's rigs are currently drilling in western North Dakota where highly specialized rig applications are needed. The second part of Patterson's business (most important) is its well service business. Operating as Universal Well Services, it provides pressure pumping services for completion. This portion of well service is outperforming and should continue to for some time. It currently sells for 8 times forward earnings and analysts estimate it will grow 220% this year. Watch this name as it is in oversold territory.
RPC Inc. (RES) is up 65% over the past 52 weeks. It is rumored that RES has hired Goldman Sacs as it is planning a sale. Since February of 2009, its market cap has quintupled. Over half of its revenues comes from pressure pumping which is used in the fraccing process. Pump trucks are in high demand, and many companies from Exxon Mobil (XOM) to Halliburton (HAL) could be interested in the company. Given the markets sell off, RES looks very good here and going forward. It sells for 7 times forward earnings and analysts estimate growth of 115% this year.
National Oilwell Varco (NOV) is up 63% over the past 52 weeks. It is a leader in providing land and offshore drilling components and rigs. It sells virtually all aspects of oilfield products and services. NOV stands to benefit significantly, as much of the "easy" oil has been found. Because of this, oil exploration and production companies are looking for oil in deep water and harsh environments. There has also been a move from conventional vertical land drilling techniques to horizontal. Horizontal drilling requires a much higher cost, and requires products and services from companies like NOV. NOV sells for 11 times forward earnings and analysts estimate growth of 8.8% this year. NOV is a very large company which would not be a bad place to hide out until the smoke clears on the US debt downgrade.
Lufkin Industries (LUFK) is up 61% over the past year. It designs, manufactures and sells oilfield equipment and power transmission products across the globe. Lufkin is currently growing through its expansion into international oilfield markets. It is also growing in mid-continent, rocky mountain and south Texas markets where horizontal drilling techniques are producing more oil and natural gas. North American pumping unit and automation sales have increased while expanding margins. Bookings have been increasing also increasing company backlog. Lufkin sells for 12 times next year's earnings and analysts estimate growth of 87% this year.
In summary, these companies have been outperforming even with the recent drop stocks. These companies are well positioned for one reason and that is U.S. oil production. Oil production increases in the United States are creating change in how the markets work. It will drive demand for oil products and services while creating an environment of growth for U.S. oil production companies. This production will decrease refining feedstock costs which should continue to aid refining margins. With the U.S. stock markets in oversold territory, now would be a good time to make a list of outperforming companies and start taking positions.