5 Oil Stocks That Could Revisit October Market Lows

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 |  Includes: AXAS, CVX, KOG, MHRCQ, NBR
by: Hawkinvest

OPEC has to keep a balance whereby oil is sold at the best possible price, but also at a price that won't cause demand destruction or a global recession. While OPEC might find the $100 per barrel level to be a "comfortable price," there is a good chance oil could head even lower in the coming months. A recent Reuters article points out the efforts being made by OPEC to keep price around $100 per barrel:

Badri again identified $100 as a comfortable price - a level endorsed by top OPEC producer Saudi Arabia in January - and said the price was being driven higher by speculators. "There has been no shortage of oil in the market. Producers have been able to meet consumer needs," he said. "We also see this as being the case for the rest of 2012 and the foreseeable future." Badri said: "Today the price continues to be driven by excessive speculation.

Regardless of what OPEC wants, the price of oil could be set for a significant correction. A number of major European countries like the United Kingdom, Spain, Portugal, etc., are already in recession, and more could join that list soon. There is a risk that a recession in countries like Spain, where the unemployment rate has surged to about 24%, could turn into a depression. Whether or not that occurs in Europe, it seems likely that economic output and demand for oil will be dropping in the coming months. Europe has an economy that is similar in size to the United States, so a decline in that economy will impact the demand and price of oil.

The United States also appears to be slowing down as stimulus spending fades and the challenges of paying back all that debt looms along with tax increases. The combination of rising taxes and reduced government spending are the same "austerity" factors that drove countries like Spain and Greece into a downward spiral that has not stopped. Officials in the United States are warning that a "Fiscal Cliff" is emerging at the end of 2012, and that poses a great risk to the economy and the price of oil.

If that wasn't enough of a challenge, the Obama Administration is planning to propose tougher regulations on gas shale fracking, and that could impact many oil and gas companies as well. These are some of the major reasons why oil stocks could be heading lower in the coming months. Investors should consider being patient and then buy some of these oil stocks when prices are at more attractive levels. Here are a few stocks to consider after oil and the stock market has gone through a correction:

Nabors Industries, Ltd. (NYSE:NBR) shares have plunged in recent weeks and now trade for almost half of the 52-week high. This company offers land drilling, fracking, engineering, transportation and other services to oil and gas companies. Investors seem to have their concerns focused on the low price of natural gas, which has recently led some companies to reduce drilling and other activities. This could lead to slower revenues for Nabors in the coming weeks and months, but investors might be overreacting since the stock now trades below book value of $20.14, and for just about 7 times earnings. This stock already looks cheap, but if oil prices head lower, it could test the 52-week low it made a few months ago on October 11, 2011. At time, oil prices traded well below $100 per barrel and the market was weak. If shares do trade back to that level, it could be a great buying opportunity.

Here are some key points for NBR:

  • Current share price: $16.26
  • The 52 week range is $11.05 to $28.74
  • Earnings estimates for 2012: $2.22 per share
  • Earnings estimates for 2013: $2.56 per share
  • Annual dividend: none

Magnum Hunter Resources Corporation (MHR) is a fast-growing oil and gas company with projects located in the Marcellus and Eagle Ford Shale areas and in West Virginia, North Dakota, Texas, Louisiana, etc. This company has seen a surge in production as new wells come on-line. However, the fast growth has created a need for capital and the company recently announced it would offer 35 million shares to investors. This is likely to put some pressure on the stock in the short-term, and additional downside could occur if oil breaks below $100 in a significant way.

On the positive side, the company expects 2012 production exit rate guidance at 18,000 BOE per day. Magnum Hunter recently reported a loss of $17.1 million, or 13 cents per share for the first quarter of 2012. However, excluding some one-time items, the loss was only 1 cent per share. A few months ago, this stock traded down to about $2.69 per share, as oil and markets went into correction mode. This stock is likely to weaken in the coming days due to the secondary offering.

Here are some key points for MHR:

  • Current share price: $5.76
  • The 52 week range is $2.33 to $7.90
  • Earnings estimates for 2012: 4 cents per share
  • Earnings estimates for 2013: 29 cents per share
  • Annual dividend: none

Kodiak Oil & Gas Corp. (NYSE:KOG) shares have been trending lower and fell further after the company released earnings. Kodiak is based in Colorado and it is developing projects in the Bakken range. The company reported revenues of $79.9 million for the first quarter of 2012, which is a huge increase from $13.3 million during the same quarter in 2011. The company expects strong growth in 2012, but it recently lowered production estimates to between about 17,000 and 21,000 barrels of oil equivalent per day. This seemed to disappoint investors and it caused some weakness in the stock. Longer-term, the prospects look bright, however, if oil prices drop and the stock market sees a correction, I expect investors to take this stock lower.

Amazingly, Kodiak shares plunged to $4.29 a few months ago. This was in October, 2011, back when both the stock market and oil prices were seeing sharp drops. Investors should prepare their portfolios for another good buying opportunity later this year. While this stock might not hit the October, 2011 lows again, it is always surprising to see how low stocks can go when fear, shorts and portfolio liquidations unite.

Here are some key points for KOG:

  • Current share price: $8.49
  • The 52 week range is $2.43 to $7.70
  • Earnings estimates for 2012: 74 cents per share
  • Earnings estimates for 2013: $1.23 per share
  • Annual dividend: none

Abraxas Petroleum Corporation (NASDAQ:AXAS) shares have been declining and it already now trades close to the October lows, which was around $2.30 per share. This oil and gas exploration and production has projects located in Alberta, the Rocky Mountains, Permian Basin, and other areas. The company has encountered some delays at its project in Alberta, Canada, but as of the last update the pipeline was completed and production was recently commenced at one well and two others were expected to come on-line soon. This should boost production in 2012, and the company has solid long-term potential. However, investors often tend to dump small oil company stocks when oil and the markets are plunging, so further weakness is possible.

Here are some key points for AXAS:

  • Current share price: $2.81
  • The 52 week range is $1.86 to $5.18
  • Earnings estimates for 2012: 14 cents per share
  • Earnings estimates for 2013: 33 cents per share
  • Annual dividend: none

Chevron Corporation (NYSE:CVX) shares traded just below $90 in October 2011. This company has been reporting solid profits thanks to high oil prices, and the stock looks to be a solid value at about 8 times earnings. However, a sustained drop in oil prices could sharply reduce profit margins. This is what some investors feared last year and it could happen again. In addition, Chevron is facing liabilities and legal issues in Brazil for an oil spill. Officials in Brazil have filed lawsuits which are reported to be for about $22 billion, and that could put pressure on the stock. If oil falls back to about $85 per barrel and the markets correct, another buying opportunity below $90 per share is likely with Chevron shares.

Here are some key points for CVX:

  • Current share price: $105.99
  • The 52 week range is $86.68 to $112.28
  • Earnings estimates for 2012: $13.40 per share
  • Earnings estimates for 2013: $13.55 per share
  • Annual dividend: $3.60 per share which yields 3.4%

Data is sourced from Yahoo Finance.

Disclosure: I am long CVX.

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.