These 3 Oil Stock Bargains Are In The 'Buy Zone' Now

Includes: COP, OHAI, WRES
by: Hawkinvest

The recent market sell-off has created new buying opportunities. Even though stocks have started to rebound, there are still some solid bargains. When stocks pullback, it makes sense to look for ones that are trading back at key support levels as this can mean downside risks are limited. When stocks hit a level that has proven to be a good buying opportunity in the past, or what I call the "buy zone", it makes sense to consider buying. Oil prices have remained strong and that is another reason why the pullback in these names below seems to be unwarranted. Here are some oil stocks that are trading near key support levels and therefore offer a great "buy the dip" opportunity:

Warren Resources, Inc. (NASDAQ:WRES) was trading for close to $3 just days ago, but the market decline has pushed it down to the $2.50 level which has historically been a great buying opportunity since the stock has bounced off that level multiple times in the past year. Since November of 2012, the market and this stock have seen volatility, but in about 6 different selloffs since then, this stock has always been a buy around the $2.50 to $2.60 level. This is because it has always rebounded sharply as shown in the chart below:

(Click to enlarge)

Warren Resources describes itself as:

An independent energy company engaged in the acquisition, exploration, development and production of domestic onshore crude oil and gas reserves. We focus our efforts primarily on the exploration and development of our waterflood oil recovery properties in the Wilmington Field within the Los Angeles Basin of California, consisting of the Wilmington Townlot Unit and the North Wilmington Unit. We are also one of the leading developers of coalbed methane natural gas, or CBM, in the Rocky Mountain region.

The company is profitable and it has been growing reserves over the past few years. For example, the latest 10-k filing shows that total net proved oil and natural gas reserves in millions of barrels of oil equivalent (MBoe) grew from 21,617 in 2010, to 22,273 in 2011, to 24,919 as of December 31, 2012. That's a jump of about 20% in just a couple of years and since around 85% of its acreage is currently undeveloped, there could be substantial future growth prospects in terms of reserves and production growth.

While a drop in oil prices could be a downside risk, that seems unlikely now especially when seeing how strong oil has held up in the recent market sell-off even as other commodities plunged. At current levels, the upside seems to significantly outweigh the downside as the stock has bounced off this area in the past, but also because it looks cheap in terms of fundamentals. Analysts expect the company to earn 30 cents per share in 2013 and that gives the stock a way below market PE ratio of just around 8 times earnings. One analyst also thinks this stock could double in value and has set a buy rating with a $5 price target, which indicates plenty of upside for investors who buy now. I think short-term traders should consider this stock for a rebound to about $2.80 in the near-term but longer-term investors might want to hold out for the much larger potential gains.

Here are some key points for WRES:

  • Current share price: $2.51
  • The 52 week range is $2.08 to $3.41
  • Earnings estimates for 2013: 30 cents per share
  • Earnings estimates for 2014: 32 cents per share
  • Annual dividend: n/a

ConocoPhillips (NYSE:COP) shares have also experienced a sharp pullback in recent days but this appears to be yet another buying opportunity. Not long ago, this stock was trading for $64 per share, but the market decline has pressured it back down to just $60. I consider this stock to be in the "buy zone" because it is still in a solid uptrend as evidenced by the chart below, and at an ideal entry point. As the light blue trendline shows, this stock is now at the low end of the recent trading range and yet it still remains in a positive uptrend. That is what makes this stock worth buying now.

(Click to enlarge)

Since ConocoPhillips did a spinoff of its refining division "Phillips 66" (NYSE:PSX), it is now a pure play in exploration and production. Although it has a substantial reserve and production base in North America, it also operates in many other countries around the world which diversifies geographic risks and adds growth opportunities.

ConocoPhillips shares appear to be a low-risk way to gain exposure to oil, and a higher than average dividend. It currently yields about 4.4% and the company has been raising the dividend over time. For example, in 2008, the quarterly dividend was 47 cents per share, but due to consistent increases, it now pays 66 cents per quarter. That is a dividend growth rate of about 50%, in just 5 years.

ConocoPhillips has been reporting strong financial results. For the first quarter of 2013, it earned $2.1 billion, or $1.73 per share. Some of the highlights include: First-quarter total production of 1,596 MBOED. Eagle Ford, Bakken and Permian combined production were up 42% when compared to first quarter 2012. Oil sands production averaged 109 MBOED, up 30% compared to first-quarter 2012, plus the company stated:

"We are off to a strong start to the year, highlighted by the announcement of two significant oil discoveries in the deepwater Gulf of Mexico," said Ryan Lance, chairman and chief executive officer. Our base business is operating to plan, our development programs and major projects are performing as expected and we are on track to deliver production and margin improvements this year. We remain committed to our goal of 3 to 5 percent volume and margin growth, with a compelling dividend.

With a solid dividend that pays investors to wait for a higher share price and with a reasonable PE ratio of just about 10 times earnings, this stock looks like a buy at current levels.

Here are some key points for COP:

  • Current share price: $60.33
  • The 52 week range is $52.84 to $64.77
  • Earnings estimates for 2013: $5.46 per share
  • Earnings estimates for 2014: $6 per share
  • Annual dividend: $2.64 per share which yields 4.4%

NGP Capital Resources Company, Inc. (NGPC) shares were trading for about $6.75 just a few days ago, however, the market pullback has punished many stocks, especially dividend-payers. The stock is

currently just above the $6 level and it appears to be in the "buy zone" now. By looking at the chart below, you can see this is the case with the shares now.

(Click to enlarge)

Back in May, the shares suffered a similar sell-off, and then went right back up to over $6.80 per share. The shares seem to be finding support again at the $6 level, and if that is the case the stock could be putting in a very bullish "double bottom" now. The recent pullback seems excessive and investors who have been panic-selling dividend stocks in the past few days, might soon regret it. Even if the 10-Year Treasury Bond now yields about 2.5% (instead of 2%), it still is not enough to pay the bills for most investors. Meanwhile, the sell-off in this stock has pushed the yield to about 10.5%. Hold this stock for the next five years and you might have well over 50% in gains from the dividend payout. Buy a Treasury Bond that yields 2.5%, hold it for five years and you will be lucky to have 12.5% returns. Plus, while bonds cannot grow earnings, a company like this could be positioned to increase the dividend in the future.

This company generates returns for shareholders by investing in royalty interests, secured debt, senior debt, subordinated debt, convertible debt, and equity. It has significant investments in the oil sector but has also diversified into other industries. It receives interest payments, dividends, and royalties. It also has gains (and sometimes losses) that are made on the sale of equity and other investments. It has invested in companies like: Black Pool Energy Partners, LLC., Rubicon Energy Partners, LLC., Crestwood Holdings, LLC., and others.

NGP Capital pays 64 cents per share in dividends on an annual basis. This provides shareholders with a yield of about 10.5%. The company recently announced it would pay the quarterly dividend of 16 cents per common share. The expected dividend payment date is July 8, 2013 to stockholders of record on June 28, 2013. It also provided an update on some new portfolio investments and said that it repurchased about 520,889 shares of its common stock (which is around 2.5% of the outstanding shares) for $6.49 per share, on average. This is significant because if the company is investing millions in its own stock at $6.49 per share, that indicates that the shares appear to be seriously undervalued after the recent sell-off. Furthermore, the company has an ongoing repurchase plan so it can continue to buy more shares which could support the stock and help lift it back to more reasonable levels. The stock also looks like a bargain based on the fact that book value is nearly $10 per share.

A major recession could impact the credit quality of the investment portfolio, however, with signs of growth in housing and other areas, this does not seem likely now. A significant drop in oil prices could also impact the value of certain portfolio holdings and put downward pressure on this stock. Obviously a big market drop like the one we have just experienced is another risk to consider, but it can also be an opportunity since investors who bought this stock in past sell-offs to this level have been quickly rewarded. With this stock about to pay another dividend, with a yield of over 10%, and with the shares trading at a discount to book value, it makes sense to follow the company and buy this beaten-down stock for income and rebound potential.

Here are some key points for NGPC:

  • Current share price: $6.10
  • The 52 week range is $6 to $7.98
  • Earnings estimates for 2013: 78 cents per share
  • Earnings estimates for 2014: 88 cents per share
  • Annual dividend: 64 cents per share which yields about 10.5%

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 am long NGPC, WRES. 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.