Reduced tensions over Iran's nuclear program, and increased fears of a slowing economy in Europe over the debt crisis in Spain and other countries have helped push oil prices down. Many oil stocks have dropped even more than the price of oil. This has created a potential buying opportunity as many forces bringing down the price of oil might only be temporary. The renewed talks with Iran are likely to go nowhere and many view the reduced rhetoric from Iran as just another delay tactic. The current negotiations possibly give Iran more time to continue making progress on its nuclear program while giving potentially false hopes to diplomats. A break down in these talks could create a significant and sudden increase in oil prices. The Obama Administration has been talking about a release of oil from the Strategic Petroleum Reserves, and about investigating oil speculation and manipulation. A release of oil from the SPR would do little to the price of oil in the long run and the "investigation" talk also appears to be more about election-year politics rather than about creating a successful energy policy for the United States. That leaves the wild-card of the European debt crisis as one of the few credible risks to the price of oil.
However, it is possible that Europe will muddle through this rolling crisis without causing a systemic collapse of the financial system. Consider all the noise and headlines for the past couple of years over Greece, and even with all that, the Dow Index is still close to 52-week highs. It's true that Spain is a much bigger problem than Greece is, but it also has a much larger economy and resources to deal with the crisis. If Europe does get through the crisis, oil has significant future upside. Another factor that could impact oil in the near-term is the coming Summer driving season. Demand for oil typically sees a seasonal increase around May as fuel needs rise, and this could put upward pressure on oil in the coming weeks. In summary, as long as Europe holds it together, many other factors are likely to keep oil in a longer-term uptrend and this is giving investors a solid and possibly brief buying opportunity. Here are a few oil stocks that have dipped recently, but still offer substantial long-term upside of about 40 to 100%, based on analyst expectations:
Key Energy Services, Inc. (KEG) shares appear to be in a major downtrend as the stock recently broke below a couple of significant support levels (both the 50-day moving average at $15.94 and 200-day moving average at $14.72). However the stock is worth watching for a bottom as Key Energy offers services such as maintenance, drilling, etc., to the oil and gas industry. Even though investors have soured on this stock in recent weeks, the fundamentals remain strong. Key Energy has a solid balance sheet and the company has been posting profits, which are expected to continue into 2012. Some investors are concerned that reduced drilling for natural gas could impact companies like Key Energy, but those concerns might be overblown. Halliburton (HAL) shares were also drifting lower on similar concerns but the company posted better-than-expected earnings just days ago and the stock has started to rebound. Analysts at Howard Weil downgraded the shares of Key Energy on April 2, 2012, from market focus to market outperform, but they left the price target at $20 per share. With Key Energy shares trading below $14 now, a rise to $20 would provide investors with a gain of more than 40%.
Here are some key points for KEG:
Current share price: $13.79
The 52-week range is $8.27 to $20.77
Earnings estimates for 2012: $1.64 per share
Earnings estimates for 2013: $2.06 per share
Annual dividend: none
McDermott International (MDR) benefits from a strong economy and high oil prices because it provides engineering and construction services primarily for offshore oil and gas projects. This stock has been trending lower and while it might not be the least-expensive stock in the oil sector, it is worth watching for a bottom. The company posted earnings of 64 cents per share for 2011, but there is reason to believe that results could improve over the next couple of years. McDermott International was recently awarded a major contract with the Inpex Ichthys project, with a value of about $2 billion. This could help financial results going forward if the company maintains adequate profit margins. In the short run, the stock might drift lower as the first quarter is not expected to be robust, but that might be a chance to buy the stock for less soon. Analysts at Howard Weil downgraded the shares of McDermott International on March 13, 2012, from market outperform to market perform, but oddly enough, raised the price target from $15 to $16 per share. With McDermott International shares trading near $11 now, a rise to $16 would provide investors with a gains of over 40%.
Here are some key points for MDR:
Current share price: $11.21
The 52-week range is $9.34 to $23.90
Earnings estimates for 2012: 88 cents per share
Earnings estimates for 2013: $1.23 per share
Annual dividend: none
Nabors Industries, Ltd. (NBR) shares were trading around $21 in early March but the stock has seen a substantial decline and now trades for less than $16 per share. It seems that most of the drop is due to falling oil prices and the concerns over reduced drilling projects from natural gas companies. Nabors is exposed to this as it provides drilling, fracking, engineering, transportation and other services to oil and gas companies. Nabors has been reporting solid results and earnings for 2011, and came in at $1.17 per share. The company could see some weakness in the coming quarters if natural gas drill slows down, but with the shares down by about 30% in one month and now trading below book value of about $19, the sell-off seems excessive. In February 2012, analysts at Argus upgraded Nabors shares from hold to buy and set a $30 price target. That would provide investors with nearly a double from current levels.
Here are some key points for NBR:
Current share price: $15.89
The 52-week range is $11.05 to $32.47
Earnings estimates for 2012: $2.24 per share
Earnings estimates for 2013: $2.71 per share
Annual dividend: none
Magnum Hunter Resources Corporation (MHR) shares have dropped from about $7.25 in late March to below $6 now. This company is exploring for and producing oil and gas projects located in the Marcellus and Eagle Ford Shale areas and in West Virginia, North Dakota, Texas, and Louisiana too. A number of good strikes have led to impressive production growth and the company expects to produce about 15,000 barrels of oil equivalent per day, for 2012. Magnum recently announced plans to buy interests in the Williston Basin in North Dakota for $311 million, so management seems interested in creating a true growth oil company. The assets being bought by Magnum produce about 950 boe/d of oil. In January 2012, analysts at Wunderlich reiterated a buy rating on Magnum shares and raised the price target from $9 to $10. That would provide current investors with gains of nearly 70%.
Here are some key points for MHR:
Current share price: $5.84
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 is sourced from Yahoo Finance. No guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.