Often it seems as if the popular stocks get run up just before they get run over. One big sign that this may be about to happen is institutional selling. More often than not it seems that the "big boys" get out while the popular stocks are being run up. In the oil market there are few more popular areas than the Bakken. In the recent past the mere mention of the name was enough to cause investors to salivate.
Now we are beginning to see weakness in many companies in the play. Institutional trading may be telling savvy investors to take their profits now. The table below gives a few statistics that may help retail investors keep up with the "big boys." It contains data for EOG Resources (EOG), Continental Resources (CLR), Northern Oil & Gas (NOG), Kodiak Oil & Gas (KOG), Newfield Exploration (NFX), and Triangle Petroleum (TPLM).
Institutional Selling (prior quarter to latest quarter)
(last six months)
% Lowering of FY 2013 EPS estimate in the last 90 days
Number of EPS estimate misses in the last four quarters
I have left many other stocks out that perhaps deserve to be in the table. Do not interpret that to mean anything but that they are not there. You will have to do your own research on any others you are interested in.
You might want to consider taking profits in any of the stocks in the above table. The data indicates that the institutional views of them -- and sometimes the insider views of them -- have deteriorated recently. If you want to consider shorting one or more of them, you will want to whittle the list down to the best candidates. To do this, you should look for outstanding traits. EOG has the highest percentage of insider selling. NOG and TPLM have by far the highest percentage of institutional selling. KOG has nearly the highest decreases in FY 2013 EPS estimates, and it has heavy debts. The combination of these two factors is a big negative for KOG. Also, NOG had the highest possible number of misses (four) in the last four reporting quarters. This is a sign of bad management. None of these stocks have high dividends, so I will ignore that aspect.
In the next table, I look at the ability of these companies to survive and prosper near term.
Total Debt/Total Capital (mrq)
Quick Ratio (mrq)
Interest Coverage (mrq)
Net Profit Margin (TTM)
Short Interest as a % of Float
The only stock I would rule out from this table is NOG. It is quite able to pay its debts. It has a healthy net profit margin and a decent price/book ratio. More than that, it has abnormally high short interest. Some might think this is good, but I like to stay away from shorting stocks that are already heavily shorted. The HFT/momentum traders have too easy a time short squeezing your position, which can be very painful. Plus, it can be hard to ignore when it should be ignored. I further believe that much of the short interest may be left over from an old accounting scandal NOG went through. This scandal did not bear fruit for the shorters, but many doubters likely remain.
The remaining three are stocks you might want to consider shorting. KOG is a loved boutique stock, so you want to be a little careful of this. However, it is heavily in debt with a total debt/total capital ratio of 44.86%, and it barely has enough to service those debts. What it has could disappear quickly in the U.S. recession that might come with the fiscal cliff. Also, KOG has the highest price/book ratio, which makes it the worst "value" stock.
TPLM also has high debt. Plus, it has a negative net profit margin of -94.33%. That is a bad combination with a possible U.S. recession coming. Almost assuredly, the U.S. will see at least a slowdown in 2013. This makes TPLM a very bad risk at the moment, although you might want to buy it back when you see the recession/slowdown turning upward again.
EOG has the second lowest net profit margin in the above table. This is a bad sign when the fundamentals for oil may be about to get worse. When you put that together with a PE/FPE pair that shows little to no growth, the outlook gets worse. When you add the -10.5% insider selling in the last six months, the picture turns ugly.
The five-year charts of these latter three names may lend some technical direction to this trade.
Click to enlarge images.
The chart above shows that EOG has put in an effective quadruple top. This is a very negative formation. In some circumstances it could mean that EOG is trying to break out higher. However, with the EU credit crisis, the fiscal cliff in the U.S., and the possible hard landing in China, the odds strongly favor a good-sized move downward of $30-$50. If the U.S. recession comes in 2013, that move could be even bigger.
The relatively high PE/FPE combination tells you there should be relatively little upside worry. The low short interest will make it harder for the HFT/momentum traders to short squeeze you. Furthermore, EOG's production is very exposed to a downturn in commodities prices. As of May 8, 2012, it had only 28% of its crude oil production hedged for 2012 and only 45% of its natural gas production hedged. For 2013 and 2014 it had only 150,000 MMBtu/d of natural gas hedged. This is very little.
The TPLM chart appears to have the same quadruple top pattern that EOG had, although the tops are a bit less defined. It should fall at least to the $5 level. TPLM is well hedged for 2012, but it has only 500 bpd hedged as of Sept. 6, 2012, for 2013 and 2014. It is susceptible to a down turn in the oil market, especially since it is currently losing money.
KOG appears to be in a weakening uptrend. It appears to have set a lower high recently. It could be putting in a double top formation. Given the weakening global economic situation, it should be very susceptible to a fall. It has high debt. Analysts have lowered its FY 2013 EPS estimate by more than 26% in the last 90 days, and these estimates may well get lowered further soon. It had the highest price/book and the least ability to service its debts. These are big negatives in this kind of environment. It can easily fall to the $7.50 area, and it can almost as easily fall to the $6 area. Many are considering that this may be a buyout target, but few think that it will get a premium valuation. There is little risk to shorting this barring a huge surge in oil prices.
KOG is limited to 85%-90% hedging under its credit facility. Plus, it experienced differentials in its price per barrel vs. WTI prices of $4.00 to $13.50 per barrel in 2011. This has probably been alleviated a bit in 2012, and one would expect it to improve in 2013. Still, it is a worry in a tough economy.
On top of all of the specific reasons for shorting these stocks, drilling in the Bakken is slowing down. The rig count has gone down to 194 in July 2012. This is 11% lower than the 214 rigs active in May 2012. Bakken wells are expensive, and they keep getting more so. On top of that, the new plays many are talking about are in the Three Forks, which is below the Bakken. In other words, you have to drill even deeper, and it's even more expensive.
Furthermore, there are uncertainties over the how fracking regulations may change, and there is the added question of whether the state or the federal government (when you are drilling on land leased from the federal government) will be regulating the fracking. Obama is feeding this concern with a drive to regulate fracking on federal lands. Also, there may be a short-term glut of oil in the markets as Libyan production comes back online and economies slow worldwide.
If you decide you do not want to short these stocks, you should at least consider selling them in the near term. You can always buy them back after the dangers of the fiscal cliff and a possible U.S. recession are past.
Note: Some of the above fundamental fiscal data is from Yahoo Finance and TD Ameritrade.