3 Undervalued Stocks To Consider For The Coming Oil And Gas Rebound

Includes: BBG, MHRCQ, NBR
by: Trade In Mexico

The price of oil has plunged in the past couple of months over concerns that the global economy is on increasingly shaky ground. Earlier this year, oil was trading at about $105 per barrel, but it has since dropped to around $86, down about 20%, in a relatively short time. This has created what might be a unique and temporary buying opportunity in a number of energy stocks, which have fallen (in many cases) much more than oil itself.

Investors and markets tend to get carried away to the upside when things are going well and that is why bubbles occur. The same is true when momentum to the downside often takes stocks that should be trading much higher to bargain levels. There are many factors that could cause oil and gas prices to move up, taking a number of deeply oversold energy stocks much higher. Both oil and natural gas have already started to show signs of a bottom and could be poised to rebound further for many reasons:

1. Iran is still a potential issue as it continues to pursue a nuclear program that much of the world is against. This has resulted in major sanctions on Iran. The war of words is continuing and could escalate into a crisis if no solutions are found. A new report says the United States is sending another aircraft carrier to the Middle East about four months early. One analyst sees oil hitting $200 per barrel by August if Iran disrupts oil supplies.

2. Many governments are awash in debt and are following the strategy used in the past, which has been to print money. Stimulus and money printing have historically led to a drop in the value of currencies and a rise in inflation. Hard assets like oil and gold that can't be printed by governments are often sought after by investors when signs of inflation heat up.

3. The price of oil has dropped in part due to concerns over the slowdown in China. This country has been seeing fast growth and that has led to increased consumption of oil for several years. This appears to be a secular trend as rising incomes in China will continue to create more demand for energy in the future. While the Chinese economy has seen some weaker-than-expected data points, the government has responded by cutting rates twice in the past few weeks. That could be enough to spark a rebound in demand for oil in the coming quarters.

4. Another big reason the oil and gas sector could be heading higher is because stocks are simply oversold. Many stocks are trading at or near lows not seen since October 2011. Investors who bought at that time when stocks were cheap and pessimism was at high levels, saw returns of over 50% in many cases.

5. The 2012 hurricane season has just started and it is not officially over until November 30. That puts oil and natural gas in a seasonal "sweet spot," which is another supporting factor for the price of both these commodities. Hurricanes often disrupt the supply of energy, particularly from oil and gas rigs located in the Gulf of Mexico. Investors and speculators often push up energy stocks along with the price of oil and gas when big storms hit, as they do each year.

Here are some stocks that could be ready to rally significantly as energy prices rebound:

Magnum Hunter Resources Corporation (MHR) is a fast-growing oil and gas company with projects in the Marcellus and Eagle Ford areas. Magnum shares have dropped not only due to the decline in oil prices, but also because the company announced a secondary offering at $4.50 per share. The shares have also dropped because a major storm caused a power outage in the Appalachia region, which impacted production for Magnum. While this is not good news, the effects should only be short-term and could just be providing a better buying opportunity in the stock.

According to an investor presentation, the current management team at Magnum took over the leadership of the company in May of 2009. Back then, the stock was trading at just around 37 cents per share and now it is over 10 times that amount. In this time period, the market capitalization has surged from about $10 million to around $600 million, which shows the incredible investment opportunities that small oil stocks can offer. Management has set production exit rates for 2012 at 18,000 barrels of oil equivalent per day. Another positive is that even with the big rise in the share price, the management is still buying at current levels. Stephen C. Hurley, a director, bought 10,000 shares on June 5, 2012. With the stock trading at about half its 52-week high, it looks oversold and undervalued.

Key Data Points For Magnum Hunter:
Friday's price: $3.63
52-Week Range: $2.33 to $7.90
Dividend: None
2012 Earnings Estimate: 1 cent per share
2013 Earnings Estimate: 35 cents per share
P/E Ratio: About 11 times forward earnings

Bill Barrett Corporation (NYSE:BBG) is an oil and natural gas company that has projects in the Piceance Basin in Colorado, specifically the Williams Fork Formation/Gibson Gulch. It is also developing projects in Uinta Basin in Utah and the Powder River Basin in Wyoming. This company was formed in 2002, and it has made repeated acquisitions, with major deals made in 2002, 2003, 2004, 2006, and 2009. The company website confirms that Bill Barrett plans to keep focused on strategic acquisitions and it states:

"Past acquisitions have played an important role in establishing our asset base. We intend to use our experience and regional expertise to supplement our drill-bit growth strategy with complementary acquisitions. We actively review acquisition opportunities on an ongoing basis."

To get a better idea of what types of acquisitions the company might be most interested in, it might help to look for hints in a recently issued press release in which the company says "...activity for the remainder of the year will target oil and NGL-rich resources." Like most companies, this one is focusing on the far more valuable natural gas liquids and oil plays. A number of companies could be attractive takeover targets or joint venture partners for Bill Barrett, which could fuel future growth. One investment firm sees Dejour Energy (DEJ) as an attractive joint venture or buyout target for Bill Barrett due to geographic proximity and a similar focus and strategy. Analysts see earnings doubling in 2013, which shows the potential this company has achieved. Bill Barrett has been successful in delivering fast growth through acquisitions and this trend is likely to continue going forward. The shares have already started to rebound off recent lows, but still look to have plenty of upside.

Key Data Points For Bill Barrett:
Price at the time of writing: $20.01
52-Week Range: $15.42 to $52.13
Dividend: none
2012 Earnings Estimate: 52 cents per share
2013 Earnings Estimate: $1.15 per share
P/E Ratio: About 15 times forward earnings

Nabors Industries Ltd. (NYSE:NBR) offers a number of services to the oil and natural gas industry, including engineering, drilling, transportation, fracking and other services. Investors seem to have overreacted by selling this stock down to current levels because the company has no direct exposure to the price of oil and gas. Plus, it now trades for about 7 times earnings and below book value, which is around $20 per share. Nabors has been reporting solid financial results and the company earned 65 cents per share in the first quarter of 2012.

In another sign the stock is deeply undervalued, the company recently announced a shareholder rights plan, which caused the stock to move higher. The board adopted this new plan in order to help ensure that it will be able to fend off a hostile takeover if the price is too low and not in the best interest of shareholders. This stock could be a takeover target if the shares don't move higher soon.

Key Data Points For Nabors:
Friday's price: $14.29
52-Week Range: $11.05 to $27.63
Dividend: None
2012 Earnings Estimate: $2.09 per share
2013 Earnings Estimate: $2.21 per share
P/E Ratio: About 7 times earnings

Data is sourced from Yahoo Finance.

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

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.

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