Buying Oil Stocks? Avoid Middle East Exposure

Includes: CRUD, ERF, OCTX
by: Gold Traders

Bullish momentum in oil prices has been one of this year's driving market stories. Even with the declines seen in recent weeks, West Texas Intermediate crude (WTI) is showing year-to-date gains of more than 21%:

Recent losses have been inspired by government inventory reports showing that U.S. oil supplies have grown at their fastest pace in a year. But these declines have been relatively short term in nature and the underlying trend here is clearly bullish for oil stocks (which have tracked most of these runs higher). So, does this mean that all the bargains in oil stocks have disappeared? How should investors position if continued unrest in the Middle East disrupts oil supplies and weighs on earnings prospects for companies with excessive exposure to the region.

Here, we will look at two North American oil stocks that are relatively shielded from any negative effects that could be seen if political and/or military conflicts re-assert themselves in the Middle East. What many commodities investors fail to realize is that a country like Syria accounts for less than 0.5% of the world oil supply (a roughly 400,000 barrels of oil per day), so it makes sense to focus on companies based in the U.S. and Canada as alternatives accompanied by less external risk. The U.S. is now seen overtaking Russia and the world's largest producer of oil and natural gas, and Canadian oil imports far surpass what comes out of Saudi Arabia (by a daily margin of nearly 1 million barrels). For these reasons, it makes sense to look at North American companies poised to benefit from this year's rally in oil prices.

Diversified Growth Options

The first to look at is the Enerplus Resources Fund (NYSE:ERF), which places most of its focus on Western Canadian properties in the mature development stage and is the largest oil and natural gas income fund in North America. For the second quarter, the company's annual production levels rose by 10%, and its diversified portfolio of high-quality growth resources puts Enerplus in a strong position to benefit from demographic trends and rising oil prices. Year-to-date, ERF has seen rallies of nearly 30% but the latest pullback in market valuations offers a new opportunity for investors to get long and gain exposure to energy markets without the added risks of companies that could be vulnerable to trade route disruptions in the Middle East (for example, in the all-important Suez Canal). With its $3.4 billion market cap and 6.4% dividend yield, Enerplus offers a stable alternative for playing energy markets and recent weakness in both commodities and the stock price itself should be viewed as a buying opportunity.

For investors focused on longer-term growth opportunities, an excellent alternative is Octagon 88 Resources (OTCPK:OCTX), which has yet to capitalize on the yearly rally in the underlying oil price and has made important progress in some significant (and relatively "under the radar") development projects. One of the best examples can be seen in its Peace River development in Alberta, Canada. Coming development in Peace River (one of the region's biggest oil sands locations) could contribute as much as 1.6 billion barrels of oil in Octagon's bottom line productivity levels as we head into 2014. Stock prices are still trading near the middle of the company's year-to-date range, so it is clear that most of the market has missed the added potential created by the Peace River project and the stock itself has yet to benefit from this year's rally in oil prices. All of this points to prolonged upside for those looking to get into the stock in the early stages.

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

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