Profitable Oil Companies: An Opportunity to Buy on Pullback?

Includes: COP, EGN, HES, MROI, XOM
by: Marc Chaikin

Turmoil in the Middle East has driven oil prices higher. Leading economists believe this has resulted in a slowdown in global economic growth and that the impact will spread in the next few months. Mark Zandi, chief economist at Moody’s Analytics, cut his forecast for U.S. economic growth for 2011 to 3.5% from 3.9%, citing rising oil prices and spending cuts in Washington. Most importantly he raised his estimate of the average price of oil for 2011 to $100 per barrel from $90.

U.S. consumers have felt this pain daily in recent weeks as they stop to refuel their vehicles and have dipped deeper into their pockets just to get around. We believe buying oil company shares on the current price pullbacks is a strategy which will succeed based on the rising price of oil and a continued uptrend in the U.S. stock market led by large cap stocks.

We have screened our data base for U.S oil companies with a Very Bullish Power Gauge rating and very positive Chaikin Money Flow. These five energy companies, all driven by a healthy ROE, consistent earnings performance, solid operating margins, strong analyst support and very positive Chaikin Money Flow activity, are attractive buys. This group has provided strong gains in 2011, beating all major market averages. We view this week’s pullback in these companies as an opportunity for investors to buy them on 10%-15% pullbacks from recent highs.

The Chaikin Power Gauge rating is based on a 20-factor model incorporating Financial Metrics, Earnings Performance, Price/Volume activity and Expert Opinions to determine a stock’s potential over the next 3-6 months.

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Company (Ticker) Current Price YTD % Change Market Cap ROE Operating Margin Pullback Target
ConocoPhillips (NYSE:COP) $75.18 10.2% 108B 17% 8% 71.5 - 72.9
Energen Corp (NYSE:EGN) $59.34 17.4% 4B 14% 32% 55.5 - 57.3
Exxon Mobil Corp (NYSE:XOM) $81.38 9.2% 403B 23% 12% 79.4 - 80.3
Hess Corporation (NYSE:HES) $78.74 1.7% 27B 14% 11% 78.0 - 78.6
Marathon Oil (NYSE:MRO) $48.59 29.3% 35B 11% 6% 45.5 - 47.5

ConocoPhillips (COP) $75.18

Energen Corp (EGN) $59.34

Exxon Mobil Corp (XOM) $81.38

Hess Corporation (HES) $78.74

Marathon Oil (MRO) $48.59

All of these stocks have seen analysts raise 2011 earnings estimates, leading to a bullish Expert Opinions metric. Relative price strength vs. the overall market, very bullish Chaikin Money Flow activity and a positive Chaikin Price Trend contribute to a very bullish Price Volume Component. These stocks are in the process of pulling back from their recently established 52-week highs. Based on historic patterns, pullbacks of 10%-15% should be sufficient for these market leaders to find renewed buying support from institutional investors, many of whom are underinvested in large cap energy stocks.

We believe that these stocks will resume their uptrends and make new 52-week highs in the next few months, continuing to outpace the overall market.

For more in-depth analysis on these stocks, please click here.

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