2 Oil Stock Bargains Worth Buying Below Book Value Now

Includes: CVX, HERO, WFT, XOM
by: Trade In Mexico

Most oil stocks have rebounded from recent lows, but there are still plenty of bargains left in the market, especially if you patiently wait to buy on dips. One way to screen for potential bargains is by looking at the book value for a stock. Book value is one method used by many investors to determine whether a stock is undervalued. Since it measures the total assets owned by a company, minus the liabilities, it creates a theoretical value for what a company might be worth if it were liquidated in an asset sale. Since most stocks trade well-above book value, investors often have to look at lesser-known companies to find deep value. For example, Exxon Mobil (NYSE:XOM) shares have a book value of around $35.14, and the stock trades for more than double that level at about $88 per share. Chevron (NYSE:CVX) also trades for about twice book value which is about $66, while the stock is now around $113 per share.

Book value is just one method to consider in finding undervalued equities, and these stocks are showing that and other signs of undervaluation:

Weatherford International Ltd. (NYSE:WFT) shares are trading at $12.47 and the stock has a book value of $13.05. This company is a leading provider of offshore drilling and other services to the oil and gas industry. There are a couple of reasons why Weatherford shares are at undervalued levels, but in time these issues could fade or improve. Earlier this year, the company announced it must issue a restatement of earnings which could involve about $225 to $250 million in adjustments. The company also has significant debt levels with around $7.89 billion in debt, and just about $339 million in cash. It also recently announced a $100 million charge relating to various government agency probes that include investigations for Weatherford's part in Iraq's oil-for-food program, as well as potential non-compliance with the Foreign Corrupt Practices Act. This $100 million figure is merely an estimate and the settlements could cost more or less. Over time, Weatherford is likely to settle these matters, and finalize the restatement issues. When that happens, the stock is likely to be trading well-above book value and that is why longer-term investors could be getting a bargain by buying now. It trades at just around 8 times forward earnings, which is another sign that the stock is cheap.

Key Data Points For Weatherford From Yahoo Finance:

  • Current price: $12.47
  • 52-Week Range: $10.85 to $18.33
  • Dividend: none
  • 2012 Earnings Estimate: $1.11 per share
  • 2013 Earnings Estimate: $1.51 per share
  • P/E Ratio: about 10 times earnings

Hercules Offshore (NASDAQ:HERO) shares are trading at $4.15 and the stock has a book value of $5.76. This company provides offshore contract drilling, liftboat and inland barge services, to the oil and gas industry. It has the fourth largest fleet of jackup rigs in the world, and the largest fleet in the U.S. Gulf of Mexico. It also owns the largest liftboat fleet with about 63 units and a inland barge drilling fleet with 16 units. This company recently reported a loss of $55.1 million, or 35 cents per diluted share. It posted revenues of $179.0 million for the second quarter 2012. These results included a non-cash charge of $47.5 million to reflect the impairment of the Hercules 185 (a damaged rig) and related deferred costs, as well as a $6.4 million expense related to the April 2012 debt refinancing, and other charges. These items approximated $36.8 million, or 23 cents per diluted share. These results show signs of improvement, although the company still has work to do to return to profitability. Insiders seem confident that the shares are undervalued as multiple executives bought the stock in April and May. Analysts expect this company to post a profit next year, and that should be a very positive upside catalyst, if achieved.

Key Data Points For HERO From Yahoo Finance:

  • Current price: $4.15
  • 52-Week Range: $2.25 to $5.57
  • Dividend: none
  • 2012 Earnings Estimate: a loss of 49 cents per share
  • 2013 Earnings Estimate: a profit of 27 cents per share
  • P/E Ratio: n/a due to losses

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.