Oil has dropped sharply from the 2011 highs, along with stocks and most other commodities. Even though many oil stocks are trading near their lows, the long-term outlook remains very positive. In fact, oil could be poised for a big rally in 2012, for two reasons: money printing and turmoil in Iran.
- The ultimate resolution for Europe might lead to loose money policies and inflation. Many believe the European Central Bank needs to lower rates and print money, much as the Federal Reserve did in the last financial crisis. The high price of oil in the midst of a weak economy is probably indicating that oil markets are betting that Germany will ultimately allow the ECB to lower rates and print money. Money printing and low interest rates tends to lead to inflation, and this would support much higher oil prices.
- Iran is also likely to be a factor in supporting higher oil prices in 2012. The Iranian population is getting restless, and sanctions are getting tougher on everyone who lives there. Iran continues to antagonize the world with hostile rhetoric and a nuclear program that most countries find unacceptable. This could lead to political instability, even a revolution. However, this process would probably be very disruptive to the production and flow of oil (as it was in Libya), which means higher oil prices.
Goldman Sachs likes the prospects for oil, and has recently selected a few stocks that make its "conviction buy" list. Goldman also gives its 6 month price target for each of these. I have reviewed the Goldman buy list and listed the prices at which I would consider buying each stock. Now is a great time to be buying oil stocks, especially on dips. Here are some favorites from Goldman Sachs:
Western Refining (NYSE:WNR) is a leading oil refining company, and also operates about 150 service stations. This stock looks cheap, with the price to earnings ratio at only about 4. Plus, this stock is trading just a couple dollars above book value, which is $9.89. This stock was trading around $17 per share just a few weeks ago, then it plunged to about $11 and has rebounded somewhat. Because this stock has popped up in the last few days, I would wait for lower prices (below $12). Goldman Sachs gives Western Refining a $33 price target, which would be a gain of roughly 95%.
Here are some key points for WNR:
- Current share price: $12.73
- The 52 week range is $8.71 to $21.75
- Earnings estimates for 2011: $3.48 per share
- Earnings estimates for 2012: $2.91 per share
- Annual dividend: none
Noble Energy (NYSE:NBL) is an oil and gas company based in Texas. This is not my favorite oil stock, and the shares have rebounded off the recent lows, so I would wait for another dip below $82 per share before considering a buy here. The dividend yield is not very generous, however, the earnings are enough to cover a much higher payout, so the dividend should be rising in the future. Goldman Sachs gives Noble Energy a $113 price target.
Here are some key points for NBL:
- Current share price: $97.60
- The 52 week range is $65.91 to $101.27
- Earnings estimates for 2011: $5.02 per share
- Earnings estimates for 2012: $6.71 per share
- Annual dividend: about 88 cents per share which yields about 1%
Pioneer Natural Resources (NYSE:PXD) is a leading oil and gas companies with projects in the United States and South Africa. This company is involved in exploration and production of various energy products. Pioneer has extensive oil and gas reserves, which will increase in value as energy prices rise. Chances are dividends will also grow with earnings and offer investors a hedge against inflation. I would consider a buy on pullbacks to $81 or below. Goldman Sachs gives Pioneer a $116 price target.
Here are some key points for PXD:
- Current share price: $93.74
- The 52 week range is $58.63 to $106.07
- Earnings estimates for 2011: $3.60 per share
- Earnings estimates for 2012: $4.61 per share
- Annual dividend: 8 cents per share which yields .1%
Exxon (NYSE:XOM) is a major integrated oil company based in Texas with operations worldwide, which include refining, exploration, and more. Exxon stock has been declining due to lower oil prices and stock market weakness over debt concerns in Europe. It dropped to about $70 recently, but has since rebounded. I would wait for a price drop to about $73 or less before buying. Goldman Sachs gives Exxon a $92 price target.
Here are some key points for XOM:
- Current share price: $79.79
- The 52 week range is $67.03 to $88.23
- Earnings estimates for 2011: $8.52 per share
- Earnings estimates for 2012: $8.41 per share
- Annual dividend: about $1.88 per share which yields about 2.4%
Data is sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.