The stock market is down about 10% from the highs reached in 2012. The price of oil was trading at about $105 per barrel earlier this year, but now trades around $85, for a drop of almost 20%. But stocks in the oil sector in many cases are down significantly more and the amount of indiscriminate selling that has occurred means there are a number of bargains that investors should be considering now.
There are many reasons why stocks have dropped, and the European debt crisis and recession, combined with new signs of economic weakness in both China and the United States, are some of the top factors. However, the ultimate solution to the economic problems facing Europe, China and the U.S. is likely to be easy money policies, low interest rates and money printing. All of these measures can weaken the dollar and create inflation over time.
At some point, investors could change their minds about the perceived "safety" of parking their money in Treasury bonds, which yield very little because over time, inflation and taxes would probably mean investors are losing money. By contrast, hard assets (like oil) that cannot be printed by highly indebted countries are likely to see renewed interest and offer investors much better returns through capital gains and dividends.
One of the leading investment banking firms, Goldman Sachs Group Inc. (GS) has recently picked a number of oil sector stocks that it believes are undervalued. Here is a closer look at some of Goldman Sachs top oil picks:
Pioneer Natural Resources Company (PXD) shares touched $115 in May, but have pulled back by nearly 30%. The company is focusing its exploration and production efforts in key areas. For oil: Spraberry and Permian Basin. For natural gas and liquids: The Eagle Ford Shale and Barnett Shale regions. Pioneer is a potential inflation hedge as it has extensive oil and gas reserves, which will increase in value as energy prices rise. It expects production to rise 23% to 27% in 2012 (over 2011 levels), and for an annual production growth rate of more than 20% through 2014.
Pioneer has been reporting solid financial results even with low natural gas prices. For the first quarter of 2012, Pioneer reported earnings of $215 million, or $1.68 per diluted share. Analysts expect earnings to surge almost 40% in 2013, and the stock trades at just about 11 times forward earnings. This is cheap for a company that is growing earnings over 20% per year. That makes this stock a solid buy, especially on dips.
Here are some key points for PXD:
- Current share price: $82.80
- The 52 week range is $58.63 to $119.19
- Earnings estimates for 2012: $5.08 per share
- Earnings estimates for 2013: $6.86 per share
- Annual dividend: 8 cents per share which yields .1%
Cabot Oil & Gas Corporation (COG) shares have actually been showing relative strength in a very weak market, but Goldman Sachs' analysts see even more upside. This fast-growing company is engaged in the exploration, development and marketing of oil, natural gas and liquids. Cabot has been reporting strong financial results and it recently announced record levels of production.
The company earned $18.3 million, or 9 cents per share, for the first quarter of 2012. This compares favorably with net income of $12.9 million, or 6 cents per share in the same quarter last year. Production during the first quarter of 2012 increased about 58% to 59.7 Bcfe, with 56.4 Bcf of natural gas production and 538 thousand barrels of liquids production. A buy on dips strategy could make sense as this oil sector growth company continues to report strong results.
Here are some key points for COG:
- Current share price: $39.07
- The 52 week range is $27.77 to $45
- Earnings estimates for 2012: 44 cents per share
- Earnings estimates for 2013: 81 cents per share
- Annual dividend: 8 cents per share which yields .2%
EOG Resources, Inc. (EOG) shares were hitting new highs this year at nearly $120, but now the stock is off about 30%, even though the strong growth prospects remain. This leading oil and natural gas company has high-potential projects in the United States, Canada, Trinidad, the United Kingdom and China. Of particular note is the fact that EOG is one of the largest oil producers in the Bakken and Eagle Ford Range.
The company has experienced fast growth in revenues and analysts expect earnings to jump from $4.56 per share in 2012, to about $5.87 per share in 2013. The dividend payout is not large, but it has been growing fast. In 2005, the quarterly dividend was just 4 cents per share but it has more than quadrupled to 17 cents per share, thanks to regular increases which are likely to continue. With top quality assets and management, this stock could be one of the first to rebound when the oil sector is back in favor with investors.
Here are some key points for EOG:
- Current share price: $89.35
- The 52 week range is $66.81 to $119.97
- Earnings estimates for 2012: $4.56 per share
- Earnings estimates for 2013: $5.87 per share
- Annual dividend: 68 cents per share which yields .8%
Noble Energy, Inc. (NBL) shares were trading over $100 earlier this year, but have declined by about 20% in recent weeks. This company has major projects in the Gulf of Mexico, Africa, the Marcellus and Niobrara Shale areas. Noble has been reporting strong results and for the first quarter of 2012, it earned $263 million, or $1.47 per share diluted, on revenues of $1,165 million. T
his compares very favorably with earnings of $14 million, or 8 cents per share, on revenues of just $899 million for the same quarter last year. The company also added 48,000 net acres in the Niobrara range, which offers growth potential. This stock is trading for just about 11 times forward earnings, which is unusually cheap for a company that has earnings growth potential of 20% or more.
Here are some key points for NBL:
- Current share price: $83.06
- The 52 week range is $65.91 to $105.46
- Earnings estimates for 2012: $5.90 per share
- Earnings estimates for 2013: $7.66 per share
- Annual dividend: about 88 cents per share which yields about 1%
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.