Just a couple of months ago, investors were feeling great, housing data looked hopeful, jobs growth numbers were solid, and oil was well over $100 per barrel. Things sure have changed. Now, the headlines are all about negativity: Oil has crashed about 25% off the 2012 highs, markets are down by around 10%, Europe could create another Lehman-like financial crisis and the global economy seems headed for recession. It's amazing how fast perception and even some data changes. The world is far from perfect and many challenges loom, however, most problems can be resolved. If Europe muddles through their problems, the U.S. and China can probably resume some growth. If the world does not come to an end, this could turn out to be one of the best buying opportunities we may see in a long time. The flood of bad news and doom and gloom has been a perfect storm, especially for oil stocks. Since this sector has seen one of the sharpest declines in the market, it could also be poised for a spring-loaded rebound, just as we saw off the October 2011 lows. Back then, many oil stocks hit new 52-week lows, only to snap back with furious strength and in many cases even double in a matter of weeks or months. With many investors either short, or short on hope, now could be the perfect time to consider buying these deeply depressed oil stocks:
Key Energy Services, Inc. (KEG) shares are at levels not seen since
the October 2011, market lows. Back then, oil and the stock markets were in decline and the shares hit a low of $8.27 on October 4. That turned out to be a great buying opportunity as the stock went on to more than double when it traded over $17 in February. Since this company provides a variety of drilling and maintenance services to the oil and gas industry, it has been impacted by investor fears over the drop in oil and gas prices. However, those fears appear overblown as the stock now trades for about 6 times earnings and even close to book value, which is $7.90 per share. Furthermore, since Key Energy does not have direct exposure to the price of oil, future financial results should not be impacted to the extent that the stock has been. This means that the currently low stock price might not last for long, and most likely, it is a great time to buy.
Here are some key points for KEG:
Current share price: $9.34
The 52 week range is $8.27 to $20.77
Earnings estimates for 2012: $1.39 per share
Earnings estimates for 2013: $1.87 per share
Annual dividend: none
Transocean (RIG) shares have been very volatile for the past few
months. This trend is likely to continue considering the oil markets and issues over the European debt crisis. Because of that, investors
should consider buying Transocean only on dips. This company is a leader in the offshore drilling industry and it has a fleet of about 138 rigs that it either owns or operates. The company recently announced a deal to sell about 30 rigs located in the Middle East for about $1 billion. This will help boost the balance sheet, and it could lower the average age of the Transocean fleet as the deal is for older equipment. The stock looks undervalued relative to book value which is $44.90 per share. Analysts are expecting strong earnings growth into 2013, a near double from just $2.89 per share this year to $5.08 in 2013. Because earnings are not expected to see a big improvement until next year, this stock is likely to see bouts of weakness when oil and the stock market drops, so patiently accumulating on dips could yield big rewards for those willing to hold the shares for at least a year or two. Analysts at FBR Capital recently set a $73 price target and put an outperform
rating on the shares.
Here are some key points for RIG:
Current share price: $44.30
The 52 week range is $38.21 to $65.41
Earnings estimates for 2012: $2.89 per share
Earnings estimates for 2013: $5.08 per share
Annual dividend: n/a
Schlumberger Limited (SLB) shares were trading around $80, earlier
this year. However, the stock has given back some of the gains, and recently dipped to about $62. Schlumberger is one of the largest project management companies for the oil and gas industry, with about $41.4 billion per year in annual revenues. It also has a strong balance sheet with around $4.08 billion in cash and $10.17 billion in debt. The company reported solid financial results with first quarter 2012 revenues coming in at $10.61 billion versus $8.72 billion in the first quarter of 2011. This resulted in net income of 98 cents per share versus 71 cents in the first quarter of 2011. Schlumberger has raised the dividend from 12.5 cents per quarter in 2006, to 27.5 cents per quarter in 2012. Thanks to steady increases, the dividend has more than double in the past 6 years, and it has room to be raised in the future. The strong balance sheet, industry position, rising dividend, all contribute to the solid fundamentals, and a buy on dips strategy makes sense.
Here are some key points for SLB:
Current share price: $66.46
The 52 week range is $54.79 to $95.53
Earnings estimates for 2012: $4.28 per share
Earnings estimates for 2013: $5.23 per share
Annual dividend: $1.10 per share which yields 1.7%
Hess Corporation (HES) shares could be one of the best values in the oil sector today. The stock has recently reached very oversold levels and it now provides investors with a solid buying opportunity. When looking at a number of valuation metrics, the stock is clearly at bargain levels. It trades below book value which is $56.40. It also trades for just about 7 times earnings, which is well below the average price to earnings ratio in the S&P 500 Index, currently near 13. Hess is involved in exploration and production of oil and gas, as well as the operation of fuel storage terminals. The company has operations in 23 countries which gives it geographical diversification and numerous opportunities in Africa, Asia, Europe, Latin America and of course, the United States. The company has a sound balance sheet with about $396 million in cash. In another sign that the stock is undervalued, Hess shares have recently been purchased by company insiders. John Mullin (a director) bought 10,000 shares on May 2, 2012, in a transaction worth around $536,000.
Here are some key points for HES:
Current share price: $44.80
The 52 week range is $41.85 to $77.12
Earnings estimates for 2012: $6.20 per share
Earnings estimates for 2013: $7.19 per share
Annual dividend: 40 cents per share which yields .9%
Data is sourced from Yahoo Finance. 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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.