4 Oil Stocks With Nearly 60% Upside To Buy, 1 To Avoid ... For Now

|
Includes: BHI, DNR, MPC, NBR, TSO
by: David Alton Clark

Overview

Here we go again.

Did the last two months remind you of anything? How about the last two summers? It seems we will not receive a reprieve this summer from high volatility accentuated by abrupt daily swings based on macro-economic data. Just as I have stated many times before, use this weakness in the market as a buying opportunity.

I have selected five energy companies beaten down based on macro headlines and the recent 25% drop in the price of oil. I believe the $80 a barrel for oil is the proverbial line in the sand as far as how low oil can go. Any lower than $80 and the value proposition for U.S. shale plays fizzles out. Moreover, the Saudi's want $100 a barrel oil.

Peak oil is here and most, if not all, of the easy money has been made. Vast reserves still exist such as unconventional shale and deep water plays. Unfortunately, these endeavors are becoming increasingly expense to undertake. I posit if oil drops significantly below $80 it will be a short-lived event. The lower price will cause a seed change in the oil supply equation. Many U.S. shale projects will be shut in due to lack of profitability. Furthermore, you will most likely see some type of price stabilization actions out of OPEC.

The strong dollar combined with talk of a global slowdown has caused oil to drop to its lowest level since October of 2011. Nevertheless, let's not forget we have the European oil embargo of Iranian oil kicking in on July 1st. This would seem like the perfect catalyst for Iran to rattle its saber once more and cause oil prices to spike higher.

I have taken this opportunity to identify five oil companies I believe present value propositions at current levels. Please review the following section for my analysis of these companies.

Company Reviews

The stocks covered in this article possibly fall into the undervalued category. First, the shares of these companies are trading well below their consensus estimates. The companies are trading on average nearly 57% below their consensus analysts' mean price targets. This fact alone carries little weight, but it's a good starting point when looking for undervalued stocks.

Moreover, these stocks all have PEG ratios of much less than 1. A PEG ratio of less than one is perceived to be favorable and presenting significant value. Even so, you must perform further due diligence to ensure it's a value trade, not a value trap.

Finally, these stocks have average EPS growth rates for the next five years of approximately 20%. This bodes well for the future stock prices of these companies.

In the following sections, we will take a closer look at these stocks to ensure the mean target prices are justified. We will perform an analysis of the fundamental and technical state of each company to determine if it's the right time to start a position. The following table depicts summary statistics and Thursday's performance for the stocks.

Click to enlarge

Baker Hughes Incorporated (BHI)

Click to enlarge

BHI is trading well below its consensus estimates. The company is trading 46% below the analysts' consensus mean target price of $57 for the company. BHI was trading Thursday for $39.28, down almost 4% for the day.

Fundamentally, BHI has many positives. The company has a PEG ratio of .54 and is trading for slightly over book value. The company has a forward P/E of 9.04. EPS for the next five years is expected to rise by 19.17%. The company pays a dividend with a 1.47% yield as well.

Nevertheless, BHI's stock has been on a steep downward slide since November of last year. Halliburton (NYSE:HAL), one of BHI's competitors just came out and stated margins were going to be hit in the recent quarter. BHI reports on July 20th. I would avoid this stock until after the earnings announcement. There are other energy plays with more favorable circumstances at this time.

Denbury Resources Inc. (DNR)

Click to enlarge

Denbury is trading well below its consensus estimates. The company is trading 83% below the analysts' consensus mean target price of $25.15 for the company. Denbury was trading Thursday for $13.76, down almost 4% for the day.

Fundamentally, Denbury has many positives. The company has a PEG ratio of .44 and is trading for 1.17 times book value. The company has a forward P/E of 9.19. EPS for the next five years is expected to rise by 19.62%. The company has a 28% net profit margin and quarter over quarter sales are increasing at a 25% clip.

Based on analysts' mean target price, the stock is expected to nearly double in the next 12 months. Denbury blew away analyst expectations in the first quarter. The company posted record tertiary oil production. Quarterly production rose 12% on an annualized basis. Denbury raised its 2012 annual production guidance to the range of 69,775-74,775 barrels of oil equivalent per day from the previous expectation of 68,325-73,625. Denbury is a buy at these levels if you have a long-term time horizon. I like the stock here.

Marathon Petroleum Corporation (MPC)

Click to enlarge

Marathon is trading well below its consensus estimates. The company is trading 26% below the analysts' consensus mean target price of $52.55 for the company. Marathon was trading Thursday for $41.26, down almost 4% for the day.

Fundamentally, Marathon has many positives. The company has a PEG ratio of .19 and is trading for 1.58 times book value. The company has a forward P/E of 6.75. EPS for the next five years is expected to rise by 32.75%. The company pays a dividend with a 2.34% yield.

Marathon jumped Wednesday after Goldman Sachs upgraded shares to Buy from Neutral, taking a positive view of MPC's management team, its "integrated, high-quality asset base" and growing "social contract" with investors to return excess cash. The stock has been on a tear since the start of June posting higher highs and higher lows. I see this pull back as a buying opportunity.

Nabors Industries Ltd. (NBR)

Click to enlarge

Nabors is trading well below its consensus estimates. The company is trading 94% below the analysts' consensus mean target price of $25.10 for the company. Nabors was trading Thursday for $12.95, down almost 7% for the day.

Fundamentally, Nabors has many positives. The company has a PEG ratio of .52 and is trading for 69% of book value. The company has a forward P/E of 5.51. EPS for the next five years is expected to rise by 20.18%. Quarter over quarter Sales and EPS are up 31.37% and 50.56% respectively.

Barron's believes Nabors shares could jump to $30 on an upswing in natural gas prices. Additionally, the article states Nabors is back on track with a strategic and cultural transformation thanks to new CEO Anthony Petrello. The stock looks vastly undervalued here. This is a buying opportunity at this level.

Tesoro Corporation (TSO)

Click to enlarge

Tesoro is trading well below its consensus estimates. The company is trading 34% below the analysts' consensus mean target price of $31.36 for the company. Tesoro was trading Thursday for $23.41, down over 2% for the day.

Fundamentally, Tesoro has many positives. The company has a PEG ratio of .47 and is trading for slightly less than book value. The company has a forward P/E of 6.04. EPS for the next five years is expected to rise by 15%. Quarter over quarter sales are up 20%. 95% of the stock is held by institutions.

UBS upgraded Tesoro Corporation from Neutral to Buy. The price target was raised from $30 to $33. Analyst, Craig Weiland, said,

TSO has underperformed refiner peers by 25% YTD due to a challenging California refining environment in 1Q and a dearth of 1H12 catalysts. However, West Coast refining margins have recovered during 2Q on the back of lower PADD 5 refinery utilization rates and tightening product inventories. Couple this with potential asset monetizations in 2H12-early '13, and TSO's FCF yield could improve to 26%. We estimate these factors will provide for shareholder friendly actions such as the reinstitution of a recurring dividend and share buybacks in 2013.

These catalysts coupled with the fundamental positives and technical consolidation of the stock at this level since mid-April looks very positive for a move higher. I believe you have a solid entry point. I like the stock here.

Conclusion

The energy markets are notoriously volatile. The only constant is the fact that energy prices have continuously risen over the years. If you have a long term time horizon, these stocks present substantial buying opportunities. Although, I would avoid BHI until after earnings are announced in July. You may have an opportunity to pick up shares at a discount to today's price.

Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss order to minimize losses even further.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MPC, DNR, NBR, TSO over the next 72 hours.