How I'm Playing A Rebound In Oil

Includes: CRZO, EOG, MTDR
by: Clayton Rulli

Will oil continue to decline? Personally I doubt it. Many investors are spooked by the recent decline in oil price, as rumors circulating seem to indicate this is in part due to Hurricane Sandy shutting or slowing refining operations in the North East area, reducing the demand for oil slightly.

West Texas Intermediate has rebounded today, after its 14-day relative strength index plunged to 38.5 November 7, indicating oil has dipped too low. Crude dumped nearly 5%yesterday after U.S. stockpiles increased and fuel demand dipped slightly. Also, President Obama initiated some concerns that the struggle to resolve fiscal cliff worries may harm the economy.

Regardless of this short-term downward move, I believe in the long-term strength of oil. Many companies focused on oil have had outstanding performance, as the shifts from gas to oil have definitely paid off. Enough talk. How did I invest in oil in my personal trading account? I chose small yet growing companies with solid interest in oil production, as I have a certain appetite for risk in the sector.

Matador Resources Co. (NYSE:MTDR)

Matador is a $500 M market cap exploration and development company, that has experienced stupendous growth in the recent past:

  • Estimates project adjusted EBITDA to double for FY 2012.
  • Increased oil production over 6 fold for the first 6 months of 2012 versus same period 2011.
  • Proved oil reserves grew over 80% in the 6 month period from December 31, 2011 to June 30, 2011.

I am long MTDR March 16 2013 7.5 Strike Calls for $1.50 each

Carrizo Oil & Gas Co. (NASDAQ:CRZO)

Carrizo recently announced Q3 operational results, and they were impressive:

  • Achieved record oil production of 8,652 Bbls/d, a 14% sequential increase over the 2Q '12, and a 257% increase over the third quarter of 2011.
  • Record Oil Revenue of $76.9 million, amounting to 80% of total revenue.
  • Record EBITDA of $86.5 million, a 25% increase over 2Q '12 and a 108% increase over the 3Q '11.

CRZO trades at very attractive EBITDA levels, and also formed several impressive partnerships with foreign companies. Sylvester P. Johnson, CEO and President, pointed out these strengths and highlighted others at the end of their recent earnings call:

"We did a bond offering to pay up our revolver. Revolver capacity increased. The revolver is undrawn and we have $70 million of cash. And our debt-to-EBITDA dropped below 3x. So I just ask you to compare our current multiple at 3.3x cash flow per share with any other company that makes 80% of their growing revenue from oil."

Well said Mr. Johnson, well said! I am long CRZO shares at this time.

Eagle Ford Shale Exposure is Attractive:

I like the Eagle Ford Shale, as recent studies have indicated strengths in oily wells could challenge other top oily shales in the country. Although its investments in the Bakken Shale is well known, EOG Resources Inc (NYSE:EOG) has a very strong presence in the Eagle Ford Shale formation as well. Recent Q3 2012 results indicated crude oil production rose 45% while natural gas revenue was reduced by 26%, further solidifying EOG's commitment to shifting to oil production. I will be watching this company for an opportunity to buy if shares happen to dip slightly lower from here. I covered the attractiveness in the Eagle Ford Shale and companies like EOG that are focused in the area, here.

CRZO has strong positions in the Eagle Ford: Oil production is comprised of 7,200 net BOPD from the Eagle Ford, 1,050 net BOPD from the Niobrara and 150 net BOPD in other locations.

MTDR is also has a focused presence in the Eagle Ford Shale. MTDR is on track to spend about 84% of 2012 Est. Capex in the formation.

Oil Rebound Trade Summary:

I own long positions in MTDR, CRZO, and will be looking to initiate a position in EOG to play the rebound in oil, and plan on holding these companies well into 2013 at the very least.

Disclosure: I am long CRZO, MTDR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a long position in EOG at any time.

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