Oil has remained very resilient even when the stock market and the global economy were showing signs of serious weakness over the past several months. There are a number of factors that appear to be providing oil with continued strength. Central banks are expanding the money supply in an attempt to print their way out of excess debt. This is causing many investors to seek "hard assets" like gold and oil, which cannot be printed like paper currencies. Furthermore, Iran continues to push forward with a nuclear program and saber-rattling threats to shut off the Strait of Hormuz. This waterway is a major transportation route for many oil-rich countries. The issue with Iran could ultimately spiral out of control as neither side appears willing to back down. A recent CNBC article sums up the situation and hints that the global economy might be in for an oil shock similar to what was experienced in the 1970s, it states:
"In our view, not since the late 1970s/early 1980s has there been such a serious threat to oil supply", wrote Soozhana Choi, Deutsche's head of Asia commodities research, in a note to clients today. "Our assertion is in part because of the Iranian threat to close the Strait of Hormuz."
Whether or not the situation with Iran escalates into a full-scale oil shock, it appears that there are enough secular trends to support a continued rise in oil prices over the next several years. Easy money policies tend to eventually create inflation, which has historically benefited oil. Also, global population growth and increased energy consumption from emerging market countries is a trend that should increase oil prices in the long term. Here are a number of oil stocks that are worth considering whether oil makes a steady climb higher or if it sees a surge due to escalating tensions with Iran:
Weatherford International, Ltd. (WFT) offers maintenance and a variety of other services to oil and gas companies all over the world. As demand for oil rises due to global population growth and increased consumption from emerging market countries, oil companies will be forced to explore and drill for oil in more remote locations, and at deeper depths. This increases demand for the type of services that Weatherford provides. With a book value of $13.09 and strong growth prospects, this stock looks undervalued. A few weeks ago, Barclays Capital gave this stock an overweight rating and set a $30 price target. The stock is currently at the high end of the recent trading range, so it makes sense to wait for pullbacks.
Here are some key points for WFT:
Current share price: $17.74
The 52-week range is $10.85 to $26.25
Earnings estimates for 2011: 86 cents per share
Earnings estimates for 2012: $1.53 per share
Annual dividend: none
Hess Corporation (HES) is a U.S.-based oil company with operations in about 23 countries around the world. Hess engages in exploration and production, and it also operates a network of terminals used to store petroleum products. While a number of oil stocks are trading near 52-week highs, Hess shares are well below the highs, although it has started a new uptrend. This stock has more upside potential as it plays "catch up" with some of the other names in the industry. The price-to-earnings ratio is about 8 times forward earnings, which is way below the average for the S&P 500 (SPY) Index, which trades at over 12 times earnings. Since Hess has well diversified exploration and production operations, it is not likely to see a major impact if tensions in Iran increase and yet it will benefit from rising oil prices. The stock has recently been finding support around $55 per share. It may not drop that low again, but it still makes sense to wait for a pullback.
Here are some key points for HES:
Current share price: $64.13
The 52-week range is $46.66 to $87.40
Earnings estimates for 2012: $6.61 per share
Earnings estimates for 2013: $8.13 per share
Annual dividend: 40 cents per share, which yields .6%
Halliburton Company (HAL) is a leading oil services company. This stock is trading well below the 52 week high of $57.77, and it appears to be offering a solid buying opportunity. Halliburton has received claims relating to the oil spill in the Gulf of Mexico. This issue could be holding the stock back, but other companies have recently been able to settle claims relating to the spill. Halliburton should be able to resolve the claims as well and this could be a very positive catalyst for the stock. Earnings are expected to grow and the stock looks undervalued now as it trades for just about 7.5 times forward earnings. Halliburton should also benefit from the trend to drill deeper, as this requires more maintenance and other services that it provides. It makes sense to buy this stock now, and on any further dips.
Here are some key points for HAL:
Current share price: $35.64
The 52-week range is $27.21 to $57.77
Earnings estimates for 2012: $3.92 per share
Earnings estimates for 2013: $4.55 per share
Annual dividend: 36 cents per share, which yields 1%
Abraxas Petroleum Corporation (AXAS) is an oil and gas company with operations in Canada, The Permian Basin, and the Gulf Coast. This company has solid growth potential due to projects in the Bakken ranges. Abraxas has a high level of insider ownership which usually bodes well for investors. For example, Franklin Burke, a director at Abraxas, owns over 3 million shares. Companies that have high levels of insider ownership are usually shareholder friendly. Since Abraxas has operations in the U.S. and Canada, it will not be impacted by Middle East issues, however, it will benefit from the higher oil prices that usually follow flare-ups in that region.
Here are some key points for AXAS:
Current share price: $3.89
The 52-week range is $1.86 to $6.16
Earnings estimates for 2011: 11 cents per share
Earnings estimates for 2012: 29 cents per share
Annual dividend: none
Magnum Hunter Resources Corporation (MHR) is a high potential oil and gas company with projects located in the Marcellus and Eagle Ford Shale areas. Jim Cramer of CNBC's "Mad Money" show recently interviewed the CEO and Cramer is now backing the stock. When Cramer gets behind a stock, it can often lead to heavy and repeated exposure on his show. The company recently reported solid results, with output surging over 400% in the fourth quarter. It also raised guidance for 2012, to about 15,000 barrels of oil equivalent per day. This company has North American-based projects, which means supply disruptions and other issues that could affect the Middle East will not impact Magnum. This stock is in an uptrend and buying on dips is likely to reward long-term investors.
Here are some key points for MHR:
Current share price: $6.94
The 52-week range is $2.33 to $8.66
Earnings estimates for 2011: a loss of 15 cents per share
Earnings estimates for 2012: a profit of 7 cents per share
Annual dividend: none
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: 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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.