4 Oil Patch Trades To Consider

Includes: AE, CVI, EXXIQ, WTI
by: Ron Sommer

Oil prices have been rising for some months now giving a big lift to the smaller oil and gas operations companies. There are several reasons for the spike in oil prices. The first place to look is at the geopolitical situation in the Middle East. The U.S. and the European powers are ratcheting up the sanctions scheme against Iran. In response, Iran is sabre rattling with threats to close the Straits of Hormuz. They recently showed their capabilities to do just this and choking off 20% of the world's oil supplies. The U.S. Navy countered by sending a carrier task force through the straits. Another reason is the uncertainty surrounding whether Israel will attack Iranian nuclear production facilities.

If I believed in conspiracies, I would venture another opinion. Oil and gas supplies in the U.S. are plentiful and demand has been muted by both warmer than usual weather and the slower economic environment. On Friday benchmark West Texas Intermediate crude rose by $1.94 to end the week at $109.77 per barrel in New York. Brent crude rose by $1.85 to finish at $125.47 per barrel in London. WTI peaked near $114 a barrel last May, while Brent rose above $126 per barrel. The price of gasoline, which is made from crude oil, has soared with oil prices. The national average jumped by nearly 12 cents per gallon in a week, with state averages above $4 per gallon in California, Alaska and Hawaii.

The companies we highlight in this article are small. Their particular histories demonstrate a great deal of fluctuation in terms of revenues and income. By and large, business for these companies go up and down like yo-yo's. These companies all sell near their 52-week highs and double or more their 52-week lows. Though current share prices are up, they may have legs for greater gain. We consider a trade in any of these companies to be highly speculative.

Adams Resources & Energy (NYSEMKT:AE) markets natural gas, crude and other petroleum products. They also have a subsidiary that transports liquid chemicals. This is a very small company with 4.2 million shares outstanding and a float of 2.0 million shares. Market capitalization is about $173.7 million. For the twelve month period ending September 2011, EPS totaled $4.88. Earnings grew sequentially though unevenly during each quarter. Y-o-Y, EPS grew 300%. Sales also grew sequentially to $2,951.7 million, about 40.9% more than the prior year. The company has one analysts predicting FY11 EPS at $5.87 and FY12 EPS dropping down to $3.71. AE pays a dividend of $0.54 per share which provides a yield of 1.4%. The company reports positive operating cash flow each year and current is free cash flow positive. This is not always the case. Adams reports no long term debt and carries about $53.1 million in cash. The share price might peak at $65.

CVR Energy (NYSE:CVI) is an independent refiner and manufacturer of nitrogen fertilizers. The company's refinery is located in Kansas and produces some 115,000 barrels per day of medium-sour crude. In December, CVR purchased the Oklahoma-based Gary-Williams Energy Corporation. Over the past 5-6 years, CVR has seen its revenues go up and down. Revenues for the twelve months ending September 2011 rose to $6,282.5 million, or 62%, from the comparable year-ago period of $3,853.5 million. Sequential revenue increases have been uneven. For the same period, EPS grew to $3.74 from $0.25 for the prior year period. CVR carries long term debt of $591.7 million and cash of $898.5 million. The operating margin jumped to 11.2% from FY10's margin of 1.9%. Net margins are now 6.4% versus 0.4% in FY10. We can see CVI trading up to $36.

Energy XXI (Bermuda) (EXXI) is an independent oil and gas producer with operations primarily in the Gulf of Mexico and the waters off the states bordering the Gulf. The company estimates that it has proven reserves of 116.6 million barrels of oil equivalent. EXXI experienced solid sequential earnings growth for each 2011 quarter. EPS doubled in for each of the first three quarters of 2011 and advanced 48% in 4Q11 over 3Q11. For the year, EPS totaled $2.34 as compared to $0.17 for the prior year period. Revenues increased 92.1% year-over-year. Analysts are expecting FY12 EPS of $3.81. The company does not pay a dividend and it has free cash flow of $3.76 per share. Long term debt is $1,730.1 million when compared to cash of $79.4 million. The trailing PE of 16.5X seems high though the forward PE of 10.1X appears reasonable. The balance sheet is weak. The current operating margin is 31.4%. The share price could peak at $55.

Our final selection is W&T Offshore (NYSE:WTI). This is another independent working the waters of the Gulf of Mexico. WTI has proven reserves of 485.4 billion of cubic feet equivalent of gas. As with the other companies we discuss here, WTI saw revenues jump in 2011. In this case, revenues were up to $1,182.0 million from $875.5 million or 37.6%. EPS went to $2.55 from $2.15 or 18.6%. WTI has solid operating cash flow and for FY11, reported free cash flow of $3.18 per share. In FY11, the company paid a dividend of $0.16 per share. The current indicated dividend is $0.32 which generates a yield of 1.2%. The company has $4.5 million in cash and long term debt of $717 million. In our opinion, the balance sheet is poor. We think the shares are overpriced.

We conclude by reiterating our opinion that these are high risk speculative trades. Share prices have already appreciated very significantly in a short period of time and the underlying fundamentals to justify such valuations are missing. The market, being shortsighted, may continue to drive share prices up as the cost of oil continues to rise.

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