The recent drop in the price of oil has sent shares of oil producers skidding — so much so that some analysts think that the market presents a buying opportunity.
Certain oil producers, for example, have experienced share price declines of up to 25% since the end of April, largely on the expectation that the combination of fixed drilling costs and lower oil prices will result in lower profits.
“But a 15% decline in the price of oil does not justify a 25% decline in [energy-related] stock prices,” said Matt Dougherty, managing director at Advisory Research Inc., a $6.5 billion asset management firm.
Other factors also are contributing to the share price falloff, said Mr. Dougherty, whose firm manages a concentrated long-short hedge fund, the Advisory Research Energy Fund. Flooding in the 200,000-square-mile Bakken Shale area in North Dakota, for example, has cut into production and punished many oil companies operating in that area.
Since the end of April, Whiting Petroleum Corp. Ticker:(WLL) has seen its stock price fall by 22%. Shares of Brigham Exploration Co. Ticker:(BEXP) and GeoResources Inc. Ticker:(GEOI), meanwhile, have fallen nearly 25% and 29%, respectively.
“The oil producers look most attractive right now because they have sold off more than the commodity itself,” Mr. Dougherty said. “The flooding is a short-term issue, but it's already priced into the stocks.”
Unlike 2008, when oil peaked at $147 a barrel and gasoline prices first hovered above the $4 mark, the U.S. consumer has since begrudgingly adapted to the realities of oil at $100 or more per barrel.
Thus the dip to near $90 per barrel is a no-brainer for some money managers because all signs point to higher energy prices over the long term.
“We're buying more [oil company stocks] as the price of oil drops,” said Tom Villalta, a portfolio manager at Jones Villalta Asset Management LLC, a value-oriented firm with $45 million under management.
“Oil at $100 per barrel doesn't seem to have as much of an impact on our economy,” he said. “We're trying to invest as close to the actual commodity as possible by investing in companies that have reserves in oil, because when oil prices start to go up, the stock prices should go up even more.”
INTEGRATED COMPANIES
Beyond the concentrated oil producers, Mr. Villalta also likes to build exposure to integrated energy companies such as Chevron Corp. Ticker:(CVX) and ExxonMobil Corp. Ticker:(XOM).
Since the end of April, Chevron shares have fallen 8.7% and ExxonMobil shares have dropped 9.7%.
Although it might seem like a contrarian move to load up on energy company stocks at a time when oil prices are falling, the logic follows the longer-term trend that energy isn't getting cheaper.
“The longer-term prospects suggest that supply is constrained, spare capacity is pretty thin, Libya is out of the picture and most of the new demand is coming from the less developed countries,” said Stuart Glickman, an equity analyst with Standard & Poor's Financial Services LLC. “We like the integrated group because they should benefit from robust oil prices this year.”
S&P has strong “buy” recommendations on ExxonMobil and Chevron.
In terms of value in the space, Mr. Glickman pointed out that the integrated-energy-company category is trading at eight times forward earnings, which compares with a historical average of 10 times forward earnings.
For a longer-term strategy in the energy space, there is also potential in natural gas, the price of which has been depressed by oversupply for the past three years.
“We think natural gas is a lot more opportunistic because the demand is there long-term,” Mr. Villalta said.
Part of that demand hinges on advancements in gas liquefaction, which converts the fuel to a liquid for more-efficient transport. Historically, transport challenges have constrained demand for natural gas.
Since the Japanese nuclear plant disaster in March, interest has been growing in natural gas as a replacement source of energy.
“The Fukushima plant disaster has created some structural head winds for nuclear energy,” Mr. Dougherty said. “Germany has already decided to shut down its nuclear plants over the next decade by not re-licensing them, and natural gas is the most obvious replacement.”
Although the liquefaction play is likely to have an impact over the next three or four years, Mr. Dougherty said that it isn't too early to build exposure to some producer companies, including Cabot Oil & Gas Corp. Ticker:(COG), Petrohawk Energy Corp. Ticker:(HK) and Range Resources Corp. Ticker:(RRC).
Questions, observations, stock tips? E-mail Jeff Benjamin at [email protected].
