Seeking Alpha
Long/short equity, value, REITs, macro
Profile| Send Message| ()  

If you have owned the quickly rising Bakken oil E&P stocks over the last few years, you have likely made a tidy profit. It may be time to temporarily bank some of that profit. The overall market is far over bought. The price of WTI Nymex oil surpassed $110 last week (Feb. 27 - Mar. 2). It too is over bought. Plus, for every extra $10/barrel that the price of oil rises, many economic experts estimate the rise has a -0.5% effect on the US GDP.

This is partly due to the higher costs of transportation. It is also partly due to still higher oil trade deficit when oil prices rise. Monies that could be stimulating the US economies are being paid out to foreign oil sellers. Those monies will stimulate those economies instead of the US economy. Plus the EU is slowly moving into recession. Many experts estimate that it will have at least a -1% negative effect on the US GDP in 2012. The ECRI has recently reiterated its recession call for the US economy.

The table below (from the OECD) shows some of the EU countries that have recently reported negative quarterly growth results (or are looking weak).

Country

Q4 GDP 2011

Q3 GDP 2011

Austria

-0.1%

+0.2%

Belgium

-0.2%

-0.1%

Czech Republic

-0.3%

-0.1%

Estonia

-0.8%

+1.2%

Finland

+0.1%

+1.1%

France

+0.2%

+0.3%

Germany

-0.2%

+0.6%

Greece (YoY)

-7.0%

-5.0%

Ireland

N/A

N/A

Italy

-0.7%

-0.2%

Netherlands

-0.7%

-0.2%

Norway

+0.5%

+1.1%

Portugal

-1.3%

-0.6%

Slovenia

-0.7%

-0.4%

Spain

-0.3%

0.0%

Switzerland

+0.1%

+0.3%

UK

-0.2%

++0.5%

Euro area (17 countries)

-0.3%

+0.1%

European Union (27 countries)

-0.3%

+0.3%

If these results differ from others you have seen, it is likely due to the above (except for Greece) being quarterly results as oppose to year over year results. The Greece result was not in the OECD chart.

Therefore I took it from another source, which unfortunately stated it in year over year results. I left out a few countries, but I have included the EU's most important shrinking economies. These economies are weakening noticeably. With the new austerity measures, they will likely not hit bottom until the end of Q2 2012 at the earliest. There is a strong possibility that the austerity measures could lead to much more severe weakening than the planners have envisioned.

If this occurs, the bottom of the EU recession may not be until the end of 2012 or later. Japan reported -0.6 (QoQ) negative growth in GDP in the Oct-Dec. quarter. It is still mired in recession. Ireland has not reported yet. It says it does not want to misstate data. Its GDP is thought to have contracted.

On top of all of the economic data, the chart of the iShares Russell 3000 Index (IWV) looks like it is topping out. It had a big run up in 2012, but it has reached its top of last year. It now looks like it is ready to give some back. The one year chart is below (click to enlarge images):

The slow stochastic sub chart shows that IWV has been over bought for virtually all of 2012 (and some of December 2011) This rally is tired It is ready to fall. Yes there has been some good news, but there has also been a lot of bad news such as the -4.0% fall in Durable Goods Orders in February 2012. Further the rate of foreclosures hitting the real estate market is going up again (after the Robo-signing fiasco). This is tending to drive real estate prices downward.

Everything is not coming up roses, even in the US. Don't forget that the EU recession is supposed to provide a -1.0% drag on the US economy in 2012. The US has yet to see much of this, but be assured that it will. Don't forget the negative effects of high oil prices. Don't forget the estimated $783B shortfall in pension funding that S&P500 companies will have to pay this year. That is sure to cut into profits. Don't forget the ECRI has made a recession call on the US economy for 2012, which it recently reiterated.

Just as the IWV ran up quickly in the latest rally, it also has a tendency to fall quickly. Many of its stocks have very high betas. This would include most of the Bakken and Eagle Ford small cap stocks. Many of these are great stocks, but they have risen perhaps beyond easily justifiable limits on positive investor sentiment. I am not now commenting on their long term prospects. I think you can say something good about each of the stocks I am naming. However, if you want to avoid what may be a 20% to 50% or more pullback in these stocks, you may want to consider selling them temporarily. I still believe each has its merits long term, but I would like to make as much profit as I can.

As an example of what can happen, you might remember that investor favorite Brigham Exploration (BEXP) fell from $20 pre-recession to roughly $2 in the depths of the recession. It eventually rebounded to surpass it previous highs before it sold out to Statoil (STO). Yes, you would have made a profit by holding it the entire time. However, if you had sold it near $20, you would have had the money in 2009 to buy roughly 10 times the amount of stock at $2. Then you could have made 10 times the profit. The same is true of Kodiak Oil & Gas Corp. (KOG). If you do not feel comfortable selling these stocks you like, you could just decide to lighten up on them. Then you would not lose too much if they defied gravity to move still further upward in the short term (and I would hope in the long term).

The table below has some of the vital fundamentals of these stocks. My list for this article, which is by no means comprehensive, is: Kodiak Oil & Gas Corp., Triangle Petroleum Corp. (TPLM), Magnum Hunter Resource Corp. (MHR), Northern Oil and Gas Inc. (NOG), and Goodrich Petroleum Corp. (GDP).

Stock

KOG

TPLM

MHR

NOG

GDP

Current Price

$9.58

$7.47

$6.66

$22.93

$17.40

Market Cap

$2.01B

$323.38M

$887.74M

$1.45B

638.64M

Beta

3.72

2.05

1.54

2.40

1.76

Short Interest as a & of the Float

22.90%

6.90%

42.40%

39.90%

34.30%

Q4 2011 EPS

-$0.01

-$0.05

-$0.06

+$0.21

-$0.38

Amount of the miss. In Q4.

-$0.10

-$0.01

-$0.02

-$0.04

-$0.17

5 yr. EPS Growth Estimate per annum

50.00%

35.00%

NA -- but FY2013 growth = 800%

35.00%

10%

Total Debt

$750.0M

0

213.85M

$15.0M

$566.13M

Quick Ratio (MRQ)

1.5

--

--

--

--

Interest Coverage (MRQ)

0.35

--

--

--

--

As you can see all of these stocks, except perhaps TPLM, are highly shorted. TPLM has no debt. It should have little trouble servicing debt it doesn't have. The same can be said for NOG, except that NOG was involved in an accounting scandal not too long ago. I don't think anything was ever specifically proven, but the stigma remains. I have no doubt that this will hurt the company's stock price performance in a pull back. KOG, MHR, and GDP all have substantial debt for their size. KOG should be able to service its debt from its liquid assets for the short term, but it is still troubled. Plus it has the highest beta of this group of stocks at 3.72. MHR and especially GDP may have bigger problems servicing their debt. They both have good plans and good properties. However, they may get hurt substantially in a severe downturn.

I do not know how severe the coming downturn will be, but it is likely to be severe enough for me to want to unload most small cap high beta stocks, especially ones that have been having performance problems recently. I have provided two year charts for the two above with the biggest debt serving problems: MHR and GDP.

The two year chart of MHR is below:

As you can see from the chart, MHR's stock price has moved violently with the overall markets and the price of oil. I would expect it to do so again. Its Oct. 2011 closing low was $2.69. That's a far cry from the current price of $6.66 and its recent high of $7.53.

The two year chart of GDP is below:

GDP has had similar problems to MHR's. GDP's Oct. 2011 closing low was $10.77. That's a long way from its current price of $17.56 and its recent high of $18.44. Investors might like to keep some of that profit. I am out already.

This article is only meant as a starting point. Please do your own research. I am expecting an initial pull back soon. The market may recover after that. However, I expect the EU recession to really begin to drag the US equities markets downward with the coming of summer. It is too soon to be able to tell how severe the US downturn will be. US markets should show more weakness as the events in the EU eventually effect both the market sentiment and the reality of a slowdown in US businesses. The nadir of the EU recession should be in midsummer at the earliest. This means trouble ahead, especially for volatile small caps.

Chevron (CVX) and its ilk may see their stock prices go down too, but the moves won't be as drastic. Plus investors are being paid dividends to hold onto such stocks. None of the stocks in the table above pay a dividend, and they are all much less stable than CVX. You could wait for midsummer to see all of this for yourself, but your stock prices will likely be much lower by then. Now is a better time to act.

Source: These Small Cap, High Beta Bakken Oil E&P Stocks May Get Hit Hard In A Pullback