If investor sentiment has changed to, once again, favor blue chip stocks over the market’s more speculative issues, oil and gas still have sectoral price momentum.
This is evident in the price action of many of these stocks, as well as the rate at which new secondary offerings are being taken up by institutional investors.
Domestic oil and gas producers are still pretty hot in a market less willing to speculate on riskier assets. All resource investing is risky due to commodity price volatility, but the domestic oil story has tremendous institutional backing. While many large investors have abandoned precious metal stocks, oil and gas issues remain highly liquid.
One company experiencing continued price momentum on the stock market is Concho Resources Inc. (CXO). This company recently upsized a secondary offering of its shares due to heavy demand. It will sell 6.5 million new common shares at $129.00 a share to repay debt; the underwriters have the option to buy up to an additional 975,000 shares of the company’s stock.
Concho operates in the Permian Basin of Southeast New Mexico, as well as West Texas. This relatively new player began by acquisition and in 2007, was producing five million barrels of oil equivalent.
By 2011, the company produced 23.6 million barrels of oil equivalent and actually divested $200 million worth of assets in the North Dakota Bakken region for capital redeployment in the Permian Basin.
Concho produced an excellent first quarter, with net earnings tripling to $91.3 million, or $0.87 per diluted share, on production of 101,600 barrels of oil equivalent per day.
The company’s 2014 first-quarter oil and gas sales increased 40% over the first quarter of 2013, and the stock has been on a tear. Concho’s one-year stock chart is featured below:
Now good news and real economic growth in these markets are met with high valuations, and Concho certainly is expensively priced. But the growth story is real in the Permian Basin, and given the appetite that institutional investors have to take up new shares of growing domestic producers, it’s a fair bet that the current share price momentum will continue going into next year. It is a good time to be in the domestic oil business.
Countless independent energy producers are trading right at their highs on the stock market. (See “Investment Theme with Legs to the End of This Decade.”)
Another top wealth creator like Concho is Cimarex Energy Co. (XEC), which is also operating in the Permian Basin.
This stock has been going through the roof and has doubled in value over the last 12 months to become an $11.0-billion company.
As part of a balanced equity portfolio, there’s certainly room for exposure to energy. I view the sector as having a good chance of continuing its share price momentum and for many of these companies, guidance is going up.
Of course, resource investing is not without its risks; without question, these stocks have a tendency to trade in manias like all commodity-related securities.
But the operational momentum is real and big investors are still buying it. 2014 should be a very good year for both Concho and Cimarex.