, which are already moving south, may be troubled further by a
potential Federal rate hike. Renewed rate hike jitters come right
after domestic GDP recovery emerged out in the second quarter.
Per the Bureau of Economic Analysis, output in the U.S. increased
at an annual rate of 4% in the second quarter. The upside came
mainly from growing personal consumption expenditure, private
inventory investment, exports, non-residential fixed investment,
state-cum-local government spending and residential fixed
Stronger Economy, Weaker Oil
Signs of recovery in the U.S. economy, however, bring their fair
share of woes for oil. This is due to the fact that a stronger
dollar raises the price of crude as a commodity in the
international market and limits its demand. Also, the proposed hike
in Federal interest rates to pull up the greenback, has resulted in
a more pronounced flight toward U.S. government bonds and bond
In the country's oil market, this flurry of bonds has sparked
concerns about the future direction of crude price and threatens
investor sentiment. Concerns over a spike in U.S. labor costs and a
credit default by Argentina pose added concerns for investors.
What's Biting WTI Prices?
There couldn't be a worse time for crude prices. Last week, the
West Texas Intermediate (WTI) crude mostly confined itself below
the $100 mark. The closure of CVR Refining, LP's (
) refinery in Coffeyville, KS was a major culprit. Lower demand and
a stronger greenback are also pushing WTI prices to the cheap
levels of March. Moreover, lower gasoline crack spreads
precipitated by higher inventory levels is also putting downward
pressure on oil prices. Market pessimism indicates that if the
current trend continues, prices might fall to around $90 barrel in
the near term.
Where to Put My Dollars
This puts investors at a fix as to where to look for value. After
all, the fortunes of a number of sectors are invariably tied to
oil. In such a volatile market, risk-averse investors may scurry
toward Treasury bills, notes and securities issued by government
agencies. However, with the Fed steadily progressing on tapering
front making the basis differential between five and 30-year bond
yields wider, we see little incentive for investors to pour their
money into these assets now.
Lower demand for crude will create pressure on the price of the
commodity and in turn greater volatility in share prices.
This is due to the fact that investor sentiment for most oil plays
is determined by earnings and valuation multiples. As such,
investors should bet on asset-backed oil plays or exploration and
production (E&P) companies that the market is yet to fully
price in since forward multiples are lower than prior upcycles.
Choosing the Best of the Lot
Picking a stock from an entire industry could be a herculean task.
Here we will list 3 stocks that may witness an upside due to these
factors. These stocks have witnessed upward estimate revisions
recently. Moreover, share prices for each of these stocks have also
improved considerably. These stocks carry either a Zacks Rank #1
(Strong Buy) or #2 (Buy).
To further simplify things, we have found three stocks matching
this criterion. These stocks are enjoying a nice run in the market,
with prices rallying over 15% in the last three months.
Clayton Williams Energy, Inc.
Midland, TX-headquartered Clayton Williams Energy is engaged in the
exploration and production of oil and natural gas primarily in its
home state, Louisiana, and New Mexico. As of 2013 end, the company
had 70.0 million barrels of oil equivalents (MMBOE) of proved
reserves, which were 82% oil and 55% proved developed. It also
added proved reserves of 27.7 MMBOE in 2012, resulting in a reserve
replacement of 526%.
The stock holds a Zacks Rank #1 and earnings for the current year
are expected to rise 61.1%.
Estimate Revision: Clayton Williams has seen only positive
revisions in the last 60 days for both the ongoing quarter and
current year estimates. Quarterly earnings consensus has improved
from $1.44 a share to $1.46. Yearly earnings consensus has also
improved from $4.99 a share to $5.32.
Share Price: The stock has gained 2.14% over the last four weeks.
Whiting Petroleum Corp.
Whiting Petroleum Corporation acquires, exploits, develops and
explores for crude oil, natural gas and natural gas liquids
primarily in the Permian Basin, Rocky Mountains, Mid-Continent,
Gulf Coast and Michigan regions of the U.S. The company has a
long-term earnings expectation of 15.6%.
Although there are some concerns over growth rates, estimates
have largely been moving north, especially for the upcoming
quarter. The firm has a track of earnings outperformance, and the
most recent estimate suggests that we could see another beat this
quarter from this Delaware corporation.
The stock holds a Zacks Rank #2 and earnings for the current year
are expected to rise 25.6%.
Estimate Revision: Whiting Petroleum has seen 15 positive revisions
in the last 60 days both for the ongoing quarter and the current
year estimates. As a result, quarterly earnings consensus has
improved from $1.23 a share to $1.42. Yearly earnings consensus has
similarly improved from $4.65 a share to $5.08.
Share Price: The stock has gained 9.5% over the last four weeks.
EOG Resources Inc.
Houston, TX-based EOG Resources Inc. is a major independent oil and
gas exploration and production company, with operations in the
U.S., Canada, offshore Trinidad, and the U.K. North Sea. As of Dec
31, 2013, EOG's total estimated net proved reserves were 2,119
million barrels of oil equivalent (MMBoe). Approximately 94% of
these reserves were located in the United States, 4% were in
Trinidad, 1% was in Canada, and 1% in other international
locations. Total company net proved liquids reserves increased 25%,
year over year, and comprised 60% of the company's total net proved
reserves at the year end.
The stock holds a Zacks Rank #2 and earnings for the current year
are expected to rise 38.1%.
Estimate Revision: EOG Resources has seen 11 positive revisions in
the last 60 days for the ongoing quarter and 14 positive revisions
for current year estimates. Quarterly earnings consensus has
improved from $1.33 a share to $1.43. Yearly earnings consensus has
also improved from $5.33 cents a share to $5.68.
Share Price: The stock has gained a third of its value year to
The economics of oil and gas supply and demand is the fundamental
driver of the E&P industry. Previous strength in commodity
prices enabled E&P stocks to generate good returns year to date
in 2014. This is reflected in the SIG Oil Exploration &
Production Index which has traded 9.2% higher year to date. As
such, material share price rises will be rare going forward barring
some outperformers backed by a solid Zacks Rank and positive
earnings revisions. Investors looking to veer from the Fed rate
mayhem this summer should be on the lookout for these.
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EOG RES INC (EOG): Free Stock Analysis Report
WILLIAMS(C)ENGY (CWEI): Free Stock Analysis
WHITING PETROLM (WLL): Free Stock Analysis
CVR REFINING LP (CVRR): Free Stock Analysis
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