"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 (NYSE: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.