7 Oil Stocks To Buy On Dips For Big 2012 Gains

|
Includes: BP, CHK, MRO, RIG, TOT, VLO, WLL
by: Hawkinvest

After a brief recent dip, oil prices have rebounded and are currently hovering around the $100 per barrel level. There are signs of weakness in the global economy, but unless a full-scale economic crisis occurs in Europe or elswhere, it appears that the outlook for oil will strengthen in 2012. As countries around the world try to print money in order to solve debt issues, this will keep a bid under the price of oil as investors look for ways to protect themselves from inflation.

Gold and oil are hard assets that can't be printed by any government. Also fueling demand for oil in 2012, will be an expanding consumer base from emerging market economies and what might be an improving job market in the U.S. A recent Bloomberg article suggest that 2012 could see:

...Record average price in 2012 as demand in emerging markets increases and the U.S. avoids a recession.

The article goes on to state:

Evidence that stimulus measures are reviving the U.S. economy while countries from India to Brazil keep expanding is raising the outlook for oil consumption next year. Global demand will climb 1.4 percent, with China accounting for more than a 10th of the amount used, according to the International Energy Agency. Crude in New York advanced 8 percent in the year through yesterday.

Factors on the horizon that could impact the price of oil considerably in 2012 include Iran and the international response to their nuclear program. Iran has threatened to cut off oil supplies in certain instances, and that could cause an oil spike. Another major factor will be Libya, as the oil supply from that country is expected to come back fully around the third quarter of 2012. If supplies are larger than expected, this could lower oil prices.

Overall, buying oil stocks on dips is likely to pay off for investors in 2012. Here are a number of names that should be considered in any market correction: Valero Energy Corp. (NYSE:VLO) is a leading refiner of petroleum products. Refining stocks have come under pressure in recent weeks due to concerns over margins. However, those concerns appear to be overblown and fundamentally this stock appears deeply undervalued. Valero shares have a book value of $29.81 and trade at a price to earnings ratio of about 5. Any dips look like a great buying opportunity for long-term investors.

Here are some key points for VLO:

  • Current share price: $20.99
  • The 52 week range is $16.40 to $31.32.
  • Earnings estimates for 2011: $4.61 per share
  • Earnings estimates for 2012: $3.95 per share
  • Annual dividend: 60 cents per share which yields 2.9%

Chesapeake Energy Corporation (NYSE:CHK) is a leading natural gas company located in the United States. Chesapeake has projects in the Barnett Shale, the Haynesville and Bossier Shales, the Fayetteville Shale, the Marcellus Shale and the Eagle Ford Shale. After a tough 2011, due to weak natural gas prices, this stock is trading just barely over book value, which is $20.69. The natural gas outlook remains weak because Winter has been unusually warm. Because weakness is likely to persist, it makes sense to buy on dips only.

Here are some key points for CHK:

  • Current share price: $23.52
  • The 52 week range is $22 to $35.95
  • Earnings estimates for 2011: $2.82 per share
  • Earnings estimates for 2012: $2.41 per share
  • Annual dividend: 35 cents per share which yields 1.5%

BP PLC. (NYSE:BP) is a major integrated oil and gas company and is otherwise known as British Petroleum. BP is still facing challenges and expenses from the oil spill in the Gulf of Mexico, however, the company appears to be gradually working through the claims. The stock has been rising lately, so it makes sense to wait for pullbacks to about $40 or less. The dividend yield is nearly 4% and could rise as legal claims are resolved.

Here are some key points for BP:

  • Current share price: $42.96
  • The 52 week range is $33.62 to $49.50
  • Earnings estimates for 2011: $6.79 per share
  • Earnings estimates for 2012: $6.40 per share
  • Annual dividend: $1.68 per share which yields 4%

Marathon Oil Corporation (NYSE:MRO) is a leading oil exploration and production company. This stock offers value on a number of fronts: The price to earnings ratio is only about 7, the dividend yield is a solid 2.3%. Plus, this stock is trading close to book value, which is $23.79. This makes the stock attractive on any dips, especially to about $25, or less.

Here are some key points for MRO:

  • Current share price: $28.88
  • The 52 week range is $19.13 to $54.33.
  • Earnings estimates for 2011: $3.52 per share
  • Earnings estimates for 2012: $3.57 per share
  • Annual dividend: 60 cents per share which yields 2.3%

Total SA (NYSE:TOT) is a major integrated oil company, based in France with operations worldwide which include refining, exploration, and service stations. Because Total is a French company, it has often been under heavy selling pressure when European stock markets are plunging. It makes sense to be patient and wait for big drops in European stocks like Total.

Here are some key points for TOT:

  • Current share price: $49.62
  • The 52 week range is $40 to $64.44
  • Earnings estimates for 2011: $7.10 per share
  • Earnings estimates for 2012: $6.94 per share
  • Annual dividend: about $2.75 per share which yields about 5.8%

Whiting Petroleum Corp. (NYSE:WLL) is an oil and natural gas company, based in Colorado. It has major projects located in Colorado, the Gulf of Mexico and the Permian Basin, and other areas. Whiting has a strong balance sheet and a book value of $25.18 per share. This stock dropped sharply in early October, to about the $31 level. Because it is prone to sharp drops on market weakness, it makes sense to wait for another major dip to about $36 or less.

Here are some key points for WLL:

  • Current share price: $47.69
  • The 52 week range is $28.87 to $75.91
  • Earnings estimates for 2011: $3.76 per share
  • Earnings estimates for 2012: $4.22 per share
  • Annual dividend: none

Transocean (NYSE:RIG) is a major offshore oil and gas drilling contractor that operates worldwide with a fleet of about 138 mobile offshore rigs.

that it either owns or operates. This company is facing many challenges which range from legal issues for the BP oil spill, to management execution, to another new oil spill in Brazil. RIG shares have been trending lower and do not appear safe to buy yet. Clearly, the earnings projections for 2011 and 2012, are probably not sufficient to cover the currently high dividend level. A number of investors expect a dividend cut in the near future. I would consider buy RIG shares at lower levels, but only after a possible dividend cut is announced. Depending on the size of the dividend cut and other factors, RIG shares could trade between $30 to $35 per share. That would be a more appropriate time to buy.

Here are some key points for RIG:

  • Current share price: $40.04
  • The 52 week range is $43.15 to $85.98
  • Earnings estimates for 2011: $1.59 per share
  • Earnings estimates for 2012: $3.20 per share
  • Annual dividend: $3.16 per share which yields 8.1%

Data is sourced from Yahoo Finance.

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

Disclaimer: 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.