2 Dirt Cheap Oil Stocks Worth Buying Near Book Value Now

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Includes: MRO, VLO
by: Trade In Mexico

The recent drop in oil prices and the stock market has created a number of bargains in the oil sector. The following are two stocks that are oversold, trade at or below book value, and are now providing longer-term investors with a solid buying opportunity:

Marathon Oil (NYSE:MRO) is starting too look too cheap to pass up as it has given back nearly all the gains made in 2012. It has been a roller coaster ride for shareholders since the shares started the year at about $24, then surged to about $35 in February, but recently dropped back to about $24. This company has a lot going for it, and much of the decline is based on external factors like the recent drop in oil and the ever-weakening stock market. The lower share price could be a buying opportunity for a number of reasons. Marathon shares are now trading near book value, which is $24.81. It's also trading for just around 7 times earnings, and it offers a dividend that has room to rise in the future.

The company recently reported first-quarter 2012 adjusted net income of $478 million, or 67 cents per diluted share, which was slightly lower when compared to adjusted net income of $552 million, or 78 cents per diluted share, for the fourth quarter of 2011. The company plans to fuel growth with its oil shale assets in the North Dakota Bakken and South Texas Eagle Ford. With these high-potential projects the company projects a 2012 annual average of 27,500 net boed and 38,000 net boed by 2016. This would be a 15% increase from the company's previous 33,000 net boed projection. The best news is that Marathon's production from the Bakken is approximately 95% oil. While this stock could go lower if oil continues to drop, it looks cheap enough to start accumulating now.

Key Data Points For Marathon Oil:

  • Current Share Price: $24.81
  • 52-Week Range: $19.13 to $54.23
  • Dividend: 68 cents, which provides a yield of 2.6%
  • 2012 Earnings Estimate: $3.45 per share
  • 2013 Earnings Estimate: $4.16 per share
  • P/E Ratio: about 7 times earnings

Valero Energy (NYSE:VLO) operates refineries, fueling stations and convenience stores. Valero shares are now valued at just about 6 times earnings and trade below book value, which is $28.86 per share. The refining business has been tough due to weak profit margins, but, seasonally, margins tend to improve as demand for gas rises before and during the summer driving season. Another leading refiner was recently the subject of a takeover, and private equity firms like Carlyle Group (NASDAQ:CG) have been looking to buy refinery assets. With private equity firms showing interest in this sector, it could be at or near the bottom in terms of valuation. Valero is also piquing the interest of world famous oil investor T. Boone Pickens. His investment firm, BP Capital, just announced that it bought shares of Valero in the first quarter of 2012, with a transaction value of about $4.8 million. When "smart money" investors like Pickens start buying Valero, investors should probably do the same.

Key Data Points For Valero:

  • Current Share Price: $21.52
  • 52-Week Range: $16.40 to $28.68
  • Dividend: 60 cents, which provides a yield of 2.7%
  • 2012 Earnings Estimate: $3.69 per share
  • 2013 Earnings Estimate: $4.44 per share
  • P/E Ratio: about 6 times earnings

Data is sourced from Yahoo Finance.

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

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.