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4 oil stocks that aren't out of gas
Rising gas prices have already meant good things for companies that deal in bubblin' crude. But these names still have room to pump up your portfolio.
By Robert Walberg
With a mechanic for a father, I always drove rebuilt cars as a kid. The worst was half-Pontiac Ventura, half-Chevy Nova with a blue front end and a gold back end. Got a lot of dates with that baby.
Running a close second was a black Corvair that emitted gas fumes through the heat vent under the back seat. Needless to say, there were no long trips in that little beauty.
It was because of these experiences that I was so happy when I bought my first brand-new Mitsubishi Montero a number of years ago. SUVs have given me much joy over the years, though in recent weeks Ive felt the pinch of higher gas prices.
According to the government, Americans paid an average of $1.74 a gallon last week -- about three cents higher than a year ago and, worse still, the third highest average price on record. Californians are suffering the most from the recent surge in crude, with gas prices averaging more than $2 per gallon over the past few weeks.
No relief in sight
Whats behind the jump at the pump? Declining U.S. inventories, relatively high crude oil costs, political instability in the Middle East and Venezuela, and increased demand stemming from the improved worldwide economic climate. The preponderance of large vehicles on the road, my own included, hasnt helped the situation either.
Unfortunately, most industry experts see little relief in sight, especially if OPEC goes through with its scheduled production cut on April 1. The United States and others are pressuring OPEC to hold off on these cuts. OPEC next meets March 31.
While a delay in the production cuts might result in temporary relief, theres little reason to think that a meaningful drop in crude prices is coming anytime soon. Lets face it, peace and harmony arent about to break out in the Middle East, and U.S. inventories wont be miraculously replenished. Car buyers arent going to start thinking small, and the global economic rebound isnt about to reverse course. Consequently, U.S. consumers and businesses should prepare for higher energy prices in the months to come.
Related news and commentary on MSN Money
Investors also need to adjust to the reality that crude prices are likely to remain firm for the foreseeable future. Of course, higher crude prices and better-than-expected earnings throughout the oil patch havent been ignored on Wall Street. Oil equipment and services and oil-refining stocks have been among the best performers so far this year, with both groups up more than 12%. Though the oil pipeline stocks and both major and independent oil producers have lagged a bit relative to their brethren in the oil patch, they are still posting better than market returns.
After a sharp advance over the past couple of months, there has been some light profit-taking throughout the oil sector in recent days. However, investors shouldnt view near-term price weakness as a sign that the sectors bull run is over. To the contrary, strong industry fundamentals, better-than-expected earnings growth and impressive price momentum suggest that dips should be used as intermediate- to long-term buying opportunities.
Screening for possible gushers
Which stocks are poised for further gains? With the sector up so strongly over the past year, its definitely time for a rifle rather than shotgun approach. Consequently, I turned to MSNs stock screener to help me in my search for oil-patch opportunities.
My goal was to find small- to large-cap energy companies that were exhibiting relatively strong price momentum, met or beat earnings expectations last quarter and were expected to post EPS growth of at least 5% in the year ahead. I didnt want to pay too much for that growth, however, so I looked for stocks with current price-earnings ratios below 30 and price-to-cash flow ratios of 10 or less. Finally, I screened for stocks with MSN Stock Scouter ratings of 5 or better.
Though these didnt seem like particularly onerous parameters to me, only four stocks made the cut. The companies that passed these tests were Ashland Oil (ASH, news, msgs), Harvest Natural Resources (HNR, news, msgs), Norsk Hydro (NHY, news, msgs) and Oceaneering International (OII, news, msgs).
Of these four, Ashland is the most conservative play given that it is a more diversified company that trades at a modest 11.4 times next years estimated earnings, sports a relatively low beta of 0.59 and offers a dividend yield of 2.3%. Though less liquid (average daily U.S. volume is only 25,000 shares) and less well known, Norsk is also a fairly conservative option. The stocks forward P/E is a mere 13.5 and its beta only slightly higher at 0.74. Norsk, like Ashland, pays a nice little dividend of 2.2%. Year-to-date, Ashland and Norsk are up by 9.9% and 16.7%. Over the past 12 months, the stocks have enjoyed gains of 71.1% and 93.3%, respectively.
| Drill for profits in the Oil Patch | | Company name | 3/10 price | Price/sales | Current P/E | % chg YTD | Market cap | Scouter
rating | | Ashland Oil (ASH, news, msgs) | $47.87 | 0.44 | 16.1 | 9.29 | $3.3 billion | 8 | | Norsk Hydro (NHY, news, msgs) (ADR) | $69.50 | 0.63 | 12.1 | 12.46 | $18 billion | 9 | | Oceaneering International (OII, news, msgs) | $34.39 | 1.37 | 30.3 | 22.82 | $882 million | 8 | | Harvest Natural Resources (HNR, news, msgs) | $12.45 | 4.2 | 17.1 | 25.13 | $448 million | 5 |
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On the opposite end of the spectrum are Oceaneering and Harvest Natural Resources. The former has had the most sensational run over the past few months and thus trades at the highest premium to next years projected earnings, a ratio of 18.6. Meanwhile the latter, which specializes in Venezuelan properties, has also enjoyed a strong advance and is the smallest company of the bunch. However, both have experienced impressive earnings momentum and both have seen estimates for future quarters rise in recent weeks.
Investors will also want to take notice that only one analyst follows Harvest at present. If the company continues to hit on all cylinders, look for more analysts to take note. An increase in analyst coverage, especially from this level, often translates into an increase in share price.
An investment in the oil patch can help you recoup the added cost of traveling or running your business. Ill be tracking these stocks over the months to come and reporting back on their progress.
Editor's Note: At the time of publication, Robert Walberg did not own or control shares in any of the stocks mentioned in this column.
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