"Oil In Free Fall" screams the financial news headlines. What they should say is "Get your buy list ready for US Independent Oil Producers."
Below is a 6 year history of oil prices:
I don't think the Euro Mess will cause a Lehman like market meltdown like it did in 2008. Therefore I am concentrating on what happened last summer and trying to determine a buy range for two US Oil and Gas domestic producers using the history of the company's stock prices and the price of oil.
Kodiak Oil (NYSE:KOG)
Kodiak Oil and Gas is a small Bakken Oil producer that has grown rapidly over the last year. For the 1st quarter of 2012 Kodiak had revenue of $79.9M up from $13.3M in the 1st quarter of 2011. Earnings were $0.01/share vs. a loss of ($0.04)/share for Q1 2011. The Oil to Gas Ratio was 96% oil.
Obviously high oil prices are good for Kodiak. Should not low oil prices be the inverse? Below is a one year history of Kodiak vs. the IPATH OIL ETN (NYSEARCA:OIL). Up until May Kodiak's stock price tracked this ETN's price closely. Since then WTI Oil prices have dropped much further than Kodiak's stock. I suspect if WTI Oil stays under $80, Kodiak's stock will fall further. Another consideration is the well head price differential for Bakken oil. According to the Rocky Mountain Oil and Gas Journal, Oil prices on 6/23 were below $60 in the Bakken for Williston Basin Sweet Crude.
If Kodiak's stock price breaks through resistance at $7.00 I will be a buyer somewhere between $5.60 to $6.40. Note: According to Data IQ 11.9% of the float was short on May 31st.
Magnum Hunter Resources (MHR)
Magnum Hunter is much more diversified than Kodiak, but also more speculative. For the 1st quarter of 2012 Magnum Hunter Resources had revenue of $57.2M up from $14.5M in the 1st quarter of 2011. Earnings was a loss of ($0.13)/share vs. a loss of ($0.12)/share for Q1 2011. The Oil to Gas Ratio was 35% oil for Q1 2012. With the closing of the purchase of 50K net Williston Basin acres from Baytex Energy (NYSE:BTE) on May 23rd for $311M, Magnum Hunter has plans to get a lot more oily. It also has other properties in the Williston Basin, Table Land in Canada, in the oil window in Eagle Ford Shale, Marcellus Shale, Utica shale, and a majority interest in a gas pipeline in Appalachia.
Unlike Kodiak, Magnum Hunter's stock price continued to follow closely the Oil ETN price down through May, but so far in June has held at the $3.60-$4.30 level.
If Magnum Hunter breaks resistance at $3.60, I will be a buyer somewhere between $3.00 to $3.20. Note: According to Data IQ 26.8% of the float was short on May 31st.
I do not know where the price of oil will go short term but I do know that every summer for 3 years we have gone through chaotic markets for a number of reasons. I suspect that if WTI oil stays below $80 for a period of time something will happen to drive these two stocks down to my buy price points.
I recommend not to make the first buy a full position due to fact that these stocks along with the market are extremely volatile this summer.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KOG, MHR over the next 72 hours.