Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘oil stocks’

My Top Energy Pick with Market-Defying Momentum

By for Profit Confidential

My Top Energy Stock Pick for This Slow-Growth MarketThe strength in this market is with oil, as both the spot price and oil stocks are holding up very well.

While the broader market has been experiencing a well-deserved price retrenchment, both large- and small-cap oil stocks have been on the comeback trail. The price strength is helpful as speculative fervor continues to come out of equities. The performance illustrates how helpful sectoral portfolio diversification can be when asset prices fall.

ConocoPhillips (COP) is not expensively priced at approximately 9.5 times trailing earnings. The stock sold off significantly at the beginning of the year but has since recovered nicely. Currently yielding just less than four percent, this oil and gas story is similar to the other big integrated energy companies: it isn’t about production growth but more about income for investors.

One company we’ve looked at several times in these pages is Kodiak Oil & Gas Corp. (KOG). This is a Bakken oil play that’s really doing well. This stock was consistently expensive, being a highly liquid favorite of institutional investors, but earnings have caught up to the share price and the story is still intact. This junior energy producer still has a very bright future. The company’s stock chart is featured below:

 Kodiak Oil And Gas Corp ChartChart courtesy of www.StockCharts.com

Energy consistently has a role to play in equity market portfolios, and it doesn’t have to be pure-play production stories. In terms of resource investing, I find it much more attractive over precious metals, particularly for investors looking for some longevity in their holdings.

In an environment that’s likely to remain slow-growing for several years, I like both the income and capital … Read More

If This Indicator Turns, the Stock Market’s in Trouble…

By for Profit Confidential

Factors Now Creating a Positive Backdrop for This Stock MarketWith the stock market jittery due to geopolitical events, its underlying strength is highlighted by the relative outperformance of the NASDAQ Composite, the Dow Jones Transportation Average, and the Russell 2000. If these indices are doing relatively better than the S&P 500 and Dow Jones Industrial Average, then there is still an underlying strength to a market that hasn’t experienced a material correction for far too long.

The stock market has done a very good job of recovering from January’s sell-off. Certainty from the Federal Reserve, fourth-quarter earnings results that were modest but mostly met expectations, and strong corporate balance sheets are providing a decent fundamental backdrop. The stock market can have another decent year if it isn’t sidetracked by some sort of lasting shock.

The other indicator that is not directly related to the stock market but certainly is worth taking note of is the spot price of oil. Oil prices have been holding quite solidly above the $100.00-per-barrel level.

Stronger oil prices are a reflection of their own specific fundamentals, but they’re also a barometer or gauge on the part of speculators regarding future economic activity. The spot price has brought back a lot of oil stocks that recently sold off and valuations are creeping up close to previous levels (which was very expensive for Bakken oil stocks).

I maintain a positive outlook for the stock market given current fundamentals and recognize, of course, that geopolitical events can turn investor sentiment on a dime. If the stock market were to experience a substantial price correction right now, I would view it as a buying opportunity.

Earnings estimates for … Read More

Upside for Oil Appears Limited, but Investments in Oil Markets Aren’t

By for Profit Confidential

Why I Believe the Upside for Oil Is LimitedOil prices have rallied back to the $100.00-per-barrel level on some near-term supply and inventory concerns.

While the upside move is rewarding the buyers of oil stocks, I don’t think oil prices are set for an extended rally.

The chart of the West Texas Intermediate (WTI) crude oil shows oil prices bouncing higher after the formation of a bullish double bottom, based on my technical analysis. And while oil prices can head higher on the chart, I just don’t see any moves being sustainable.

Light Crude Oil ChartChart courtesy of www.StockCharts.com

The catalyst for higher oil prices has more to do with tight inventories driven by a rise in demand. The inventory of oil contracted by 1.5 million barrels per day in October to December 2013, according to the International Energy Agency (IEA). The IEA suggests the demand for oil will rise by 50,000 barrels per day to 1.3 million barrels in 2014. (Source: Johnson, C. and Sheppard, D., “Robust demand tightening oil market, IEA says,” Reuters, February 13, 2014.) If this estimate pans out, oil prices could edge higher and hold above $100.00, but I doubt the move will last that long.

Now, if China jumps out of its sluggish growth (read “Investment Opportunities in Depressed Chinese Stocks”) and Europe can drive its economic renewal, then we could see brighter prospects for oil prices.

On the supply side, America is relying less on the Organization of the Petroleum Exporting Countries (OPEC) and foreign oil as American oil companies continue to squeeze more oil out of the ground, specifically shale oil.

There may even be a time down the road when … Read More

Oil Returns as Major Indicator of Capital Markets?

By for Profit Confidential

Oil Investments Back in PlayThe lull between earnings seasons will soon be here and with the absence of corporate results, trading action can get choppy.

It’s still important to follow transportation stocks and the NASDAQ Composite. Transportation stocks have a tendency to lead the broader market, and outperformance from the NASDAQ Composite (compared to the other major indices) signals speculative fervor remains.

The one commodity that’s very much back in play in terms of a reflection of investor sentiment is oil. West Texas Intermediate (WTI) has come back to the $100.00-per-barrel level on what looks like speculative betting on better economic growth this year.

There were actually quite a few disappointments in big oil’s recent financial results and production is definitely an issue. Both large-cap and small-cap oil stocks have not seen their share prices rise commensurately with oil prices, but some value is finally appearing in this sector.

One company that we looked at previously is Kodiak Oil & Gas Corp. (KOG). This is a Bakken oil play that, until recently, was expensively priced. (See “While Few See It, This Stock Sector Is Getting Risky.”)

Kodiak expects to produce 42,000–44,000 barrels of oil equivalent per day (boepd) this year, which represents about a 45% gain over last year. The company’s stock chart is featured below:

Kodiak Oil and Gas Corp ChartChart courtesy of www.StockCharts.com

Kodiak reports its fourth-quarter and year-end financial results at the end of this month. Junior oil companies may see their fourth-quarter numbers affected by the severe cold in terms of the number of well completions.

While Kodiak may be considered a hold currently, this position is becoming more attractively valued. The … Read More

Despite Consolidation in Oil Sector, These Junior Oil & Gas Stocks Have Momentum

By for Profit Confidential

Oil in Consolidation, but Momentum Remains in Junior Oil & Gas StocksThose interested in the oil business will know that smaller stocks in the sector have mostly been doing very well, even as the spot price of the commodity dropped below $100.00 a barrel.

The run-up has been pronounced in a number of companies, likely in anticipation of third-quarter earnings. Oil stocks advancing on declining spot prices is a very unusual development in the resource sector. But there is definitely an appetite out there among institutional investors for junior oil and natural gas producers.

One company we looked at previously is Kodiak Oil & Gas Corp. (KOG). This Bakken oil play reports tomorrow, and expectations are high.

Wall Street consensus is for Kodiak to generate sales growth of around 150% in its upcoming quarter. Earnings have the potential to double over the third quarter of 2012.

Company management recently announced its full-year 2013 average daily production will be approximately 30,000 barrels of oil equivalent per day (boepd). This compares to an average of 14,000 boepd in 2012. This year’s exit production rate is currently estimated at 42,000 boepd.

So, there’s definitely economic growth in the domestic oil and gas business due to new technology and the willingness of investors to finance junior companies.

Kodiak is trading right at its all-time record high after experiencing a meaningful consolidation throughout 2012 and the first half of this year. The stock is fully priced, which is no surprise. If oil prices were to reaccelerate, this position would be even higher.

Also reporting tomorrow is ConocoPhillips (COP), which is outperforming other big oil companies on the stock market.

ConocoPhillips spun off Phillips 66 (PSX) last … Read More

Why the Street Is So Bullish on This Junior Oil Producer

By for Profit Confidential

oil stocksWith all the things going on in the world, it’s a good time to be in the oil business. Bakken oil stocks are almost all high-valuation; but the marketplace knows this, and it’s getting what it’s paying for—there’s big growth among many of these producers.

Everything is relative in the stock market. Valuations among junior oil producers with growing production (on strong oil prices) aren’t comparable to other businesses or industry sectors.

Triangle Petroleum Corporation (TPLM) recently shot way up on the stock market after reporting exceptional growth in production and its financials. This company is developing the Bakken Shale and Three Forks formations in the Williston Basin of North Dakota and Montana.

The stock’s actually been flat over the last two years. Part of the reason for this is that the company has had to sell a number of new shares in order to finance its business plan.

Triangle Petroleum recently reported fiscal 2014 second-quarter (ended July 31, 2013) revenues of $50.4 million, compared to $10.3 million a year ago.

Operating income was an impressive $13.0 million compared to a loss of $1.3 million. Net income was $6.8 million, or $0.12 per diluted share, compared to a net loss of $1.2 million, or $0.02 per diluted share.

The company finished the quarter with 57 million diluted shares outstanding, compared to 44.3 million shares last year.

The tough call in junior oil stocks isn’t knowing which companies are the big growth stories; it’s knowing the spot price of oil, because that’s always what energy stocks trade off. And naturally, you can’t predict the spot price of oil just like you … Read More

My Favorite Bakken Oil Play

By for Profit Confidential

Bakken Oil PlayFinancial metrics are improving significantly for oil stocks, and the commodity’s prices are a combination of speculative fervor mixed with geopolitical events. At $110.00 a barrel for West Texas Intermediate (WTI) crude, drill bit profitability has improved significantly.

I’ve always been an advocate of having one large, integrated oil and gas company (or limited partnership) in a long-term equity market portfolio. There are good dividends to be had and solid prospects for long-term capital appreciation.

But the marketplace is dealing with declining production among the biggest companies, and this is why smaller, domestic producers are now doing much better on the stock market. As is always the case, oil production growth must be combined with spot price growth. When the two are moving commensurately, there’s good money to be made.

As I’ve mentioned a number of times in this column, Kodiak Oil & Gas Corp. (KOG) is a popular Bakken oil play that’s highly liquid and is an institutional favorite. This company boasts excellent potential going forward. However, Kodiak is a stock with a lot of high expectations priced into its share price. (See “My Two Favorite Picks in the Speculative Oil & Gas Sector.”)

One company that I think speculative resource investors should now be putting on their radar is Northern Oil and Gas, Inc. (NOG), which is another junior oil and natural gas producer that operates in Montana and North Dakota.

Northern has been going down steadily on the stock market, as the company has had difficulty growing its production due to infrastructure issues. Specifically, company management cited adverse weather and extended road restrictions as hampering … Read More

Why You Shouldn’t Be Worried About Surging Oil Prices

By for Profit Confidential

Oil PricesI just filled my gas-guzzling SUV that only uses premium gasoline; trust me when I say it wasn’t pleasant. And I know I will need to visit the gas station again in just a few days.

I accept that, but what I don’t understand is the surging increase in oil prices. Oil is now more than $106.00 a barrel.

I realize we have the uncertainties in Egypt after the ousting of the country’s former leader Mohammed Morsi by the army. Of course, while Egypt is not a major oil producer, the Suez Canal does run through it. And a huge amount of Middle Eastern oil is carried through the canal to the Mediterranean Sea from the Red Sea.

At the current price for oil, the technical picture continues to point to gains in the near term. But I would look at an upside move in oil prices as an opportunity to sell if you currently have oil exposure. Oil is not in a sustainable upward move or bull market.

But the commodity is still advised for traders. I would expect a return to normalcy in the near future, with oil prices retrenching back to less than $100.00 a barrel.

The chart of the West Texas Intermediate crude (WTIC) oil prices below shows the overextension from the previous sideways channel, with $98.00 on the top end. I doubt the breakout will hold as the underlying fundamentals are not supporting a situation of a demand-supply imbalance.

WTIC Light Crude Oil- Spot Price (EOD) CME

Chart courtesy of www.StockCharts.com

The U.S. economic recovery is ongoing, but it’s also showing signs of stalling. U.S. companies are struggling to grow revenues and … Read More

How to Make the Current Oil Situation Work for You

By for Profit Confidential

How to Make the Current Oil Situation Work for YouThe spot price of oil is worth keeping a sharp eye on. With West Texas Intermediate (WTI) oil having jumped past $105.00 a barrel, oil stocks are moving again.

Geopolitical tensions certainly have added a bit of a premium to oil prices, but there’s been resilience in spot well over the last couple of months, and it’s based on the prospects of a stronger U.S. economy.

And that strength in oil prices, while never helpful for consumers, is happening in the face of the highest amount of U.S. crude oil production in 20 years.

The primary consequence of stronger oil prices for the consumer is obviously the bill at the pump. But it’s also in the infrastructure that is struggling to keep up with the production boom. U.S. oil production has overtaken pipeline capacity and railroads are making up for the transportation gap.

In the first half of 2013, 356,000 carloads of crude oil and refined petroleum products were moved by rail, according to the Association of American Railroads (AAR). This equates to 1.37 million barrels of oil being shipped every day, according to the U.S. Energy Information Administration (EIA).

There is now a 60,000-car order backlog for oil railcars in the U.S. market.

Based on the latest 2013 monthly output numbers, the EIA says the U.S. is producing 7.2 million barrels of crude oil per day. The majority of the increase in rail transportation of the commodity is due to the huge growth in Bakken oil production, mostly in North Dakota—which doesn’t have enough pipeline capacity. (I’ll be travelling to the Bakken oil region shortly for a first-hand account … Read More

How Rising Oil Prices Can Help Your Portfolio

By for Profit Confidential

Oil Prices There are a lot of reasons why the spot price of oil is back over $100.00 a barrel, and the fact that it is up there is very good for oil stocks.

The price of natural gas continues to be subdued, but that doesn’t mean that oil and gas companies that are growing production are not able to do well on the stock market.

Resource equity investing always has the added risk of the value of the underlying commodity, but the Bakken oil boom, itself a counterplay on oil prices, is creating a number of winners.

We looked at Kodiak Oil & Gas Corp. (KOG) before. This is one of the many highly liquid oil stocks that have become a big favorite of institutional investors.

Kodiak has oil and natural gas reserves concentrated in the Williston Basin of North Dakota and Montana and the Green River Basin of Wyoming and Colorado.

Kodiak’s first quarter (ended March 31, 2013) saw oil and gas sales of $165.1 million. That compared to $79.9 million in the comparable quarter in 2012 and $130.8 million in the fourth quarter of 2012, representing increases of 107% and 26%, respectively.

The company sold 1.95 million barrels of oil equivalent (MMBOE) in the first quarter of 2013 for a gain of 103% comparatively, of which 94% was crude oil.

Earnings came in at $19.4 million, or $0.07 per diluted share, compared to $1.7 million, or $0.01 per diluted share, for the same period in 2012.

There are plenty of oil stocks in the equity universe that have done well and should continue to do so. But even the … Read More

The Few Sectors That Will Continue to Gain in This Unpredictable Market

By for Profit Confidential

Unpredictable MarketThere is still a solid resilience to the stock market; and it’s based on global monetary stimulus combined with a sprinkling of economic news that institutional investors like.

The willingness that institutional investors have to be buyers is still quite remarkable. But then again, with bond yields creeping up, there really isn’t anywhere else to go. Investors know there’s no reason to keep money in cash.

The pronounced stock market breakout at the beginning of the year has shown very little willingness to experience a meaningful correction and, historically, that bodes well for the rest of the year.

Institutional investors don’t need a lot of motivation to buy in this market, aside from the certainty that things aren’t coming apart.

There is a Wall Street expectation that the bottom half of the year will be stronger economically, and institutional investors are buying this with the continued expectation of quantitative easing going into 2014.

The doom-and-gloomers certainly have some valid points, but they haven’t proved to be profitable in relation to the stock market or gold recently.

The Dow Jones Transportation Average looks to be experiencing a mini head-and-shoulders technical trading pattern, balancing itself out after a run of more than 6,500. There still remains a potential for rising share prices if earnings can be maintained or bettered.

It’s far too early into second-quarter earnings season to draw conclusions. It’s been a mixed bag of overperformance and underperformance.

This stock market continues to be a big hold from my perspective. There’s no particular reason to buy or sell. There continues to be difficulty in precious metal stocks as miners are experiencing … Read More

Why Supply and Demand Doesn’t Matter for U.S. Oil

By for Profit Confidential

Incredible Oil Production Growth Isn’t Helping PricesThere is now pressure on oil prices.

West Texas Intermediate (WTI) crude is getting awfully close to the $100.00-per-barrel level again. Futures traders are interpreting economic news, including last Friday’s employment report, as strength in the U.S economy.

Resource stocks have generally been trending lower, particularly in precious metals. But this hasn’t been the case with the oil stocks, especially large-cap integrated oil companies. They continue to do relatively well on the stock market even though the spot price of oil has been mostly flat until just recently.

From a business perspective, virtually any equity market portfolio is well served by having some exposure to oil stocks (environmentalists may disagree).

The last time we considered Chevron Corporation (NYSE/CVX), the position was trading around $117.00 a share. It’s currently around $121.00, having pulled back from a new stock market high of $127.40. The stock is currently yielding 3.3%.

Stock market strength among big oil stocks is pretty impressive with oil prices just under $100.00 a barrel and natural gas prices still in a long consolidation.

ConocoPhillips (NYSE/COP) is holding up extremely well, especially after spinning off Phillips 66 (NYSE/PSX), which has been an outstanding oil stock since the divestiture. Adjusted first-quarter earnings for ConocoPhillips were basically flat comparatively. The stock is currently yielding 4.3%.

Crude oil inventories in the U.S. market recently hit an 82-year high (due to all the new production). Data shows that inventories have been drawn down over the last couple of weeks.

In many ways, oil prices are also trading off the Federal Reserve.

Right now, Chevron is toying with its 50-day moving average (MA). The stock … Read More

Keeping It Rolling—U.S. Energy Boom Good News for Railroad Stocks

By for Profit Confidential

U.S. Energy Boom Good News for Railroad StocksRailroad stocks as a group have returned to their 52-week highs. I like Union Pacific Corporation (NYSE/UNP) and Canadian National Railway Company (NYSE/CNI). They are the strongest of the group and are trading right at their all-time record highs.

These two companies are worth accumulating when they’re down. According to history, they are typically not down for long. Wall Street keeps edging their earnings estimates higher for 2013 and 2014. Railroad stocks are pretty good with their guidance.

Bakken oil (and natural gas) is a huge opportunity for the U.S. economy. The production boom is happening now, with all its benefits, disadvantages, and costs. But a lot of junior oil stocks playing this patch aren’t moving upward in the stock market in the face of weak oil prices. The Bakken oil boom itself is a counter play on rising prices.

Phillips 66 (NYSE/PSX), a real winner since being spun off from ConocoPhillips (NYSE/COP), recently announced it will ship Bakken oil from North Dakota to New Jersey by rail. According to the Association of American Railroads, in 2008, U.S. Class I railroads originated 9,500 carloads of crude oil. In 2011, the number was 66,000 carloads. The final number for 2012 is expected to exceed 200,000 carloads, and railroads are also expected to deliver large amounts of frac sand to drill sites. This is a seriously good trend for railroad stocks. The stock chart for Phillips 66 is featured below:

PSX Phillips 66 stock market chart

Chart courtesy of www.StockCharts.com

Of course, the Bakken oil boom has its consequences, and we’re not even talking environmentally. Make no mistake: big oil is not interested in U.S. energy independence. Its … Read More

Best Turnaround Trade in Years May Be on the Horizon

By for Profit Confidential

Best Turnaround Trade in Years MayThe spot price of oil keeps taking it on the chin, while gasoline prices remain lofty, padding the pockets of the big integrated oil companies even more. What a great business to be in. Which is why, of course, a stock market portfolio should have some exposure to large integrated oil and gas companies.

U.S. domestic oil production continues to experience a renaissance, but Bakken oil stocks aren’t going up with oil prices stuck in the low $90.00s.

I’m still amazed at the strength of the major integrated oil and gas companies on the stock market. Here we have a glut of natural gas and declining oil prices; yet on the stock market, Chevron Corporation (NYSE/CVX) is trading at an all-time record high. Frankly, I like Chevron, and if the stock is at a record high with these fundamentals, just imagine where it will go when the cycle changes.

Speaking of which, a great trade may be coming down the pipeline, and it could be one of those rare buy low/sell high opportunities. The trade is in natural gas. It isn’t going to happen tomorrow, but natural gas prices are going to turn; and when they do, there will be a lot of organic leverage available in the right stocks. I’d be scoping the stock market now for candidates.

One group of stocks that are down right now and worth looking into is the small-cap oil and gas services stocks. Large-cap oil and gas services are doing better on the stock market, but there’s more growth available from Bakken oil and gas services than from in the Gulf of … Read More

The Only Way to Beat Rising Gasoline Prices

By for Profit Confidential

Beat Rising Gasoline PricesWith remarkable consistency, oil stocks continue to do great on the stock market. Even though spot oil seems to be stuck below $100.00 a barrel, gasoline prices have been going up for the last month, as U.S. refiners use January and February for maintenance shutdowns.

Any way you cut it, oil remains a huge part of our daily lives, and most oil stocks are trading at or very near their all-time record highs. I should qualify that—what I mean is that most big oil stocks are trading right at their highs. Even with the U.S. oil production boom (which is very real), smaller oil stocks just don’t go up in value unless the spot price is doing so as well.

I always love consistency in a stock market investment. Consistent growth in earnings, dividends, and share price is absolutely golden, considering the volatility we get in capital markets. Save for pumping from your own oil well, you can only beat rising gasoline prices by owning a part of the company, and the biggest ones offer some of the best consistency the stock market has to offer.

Consider Chevron Corporation (NYSE/CVX), which is one of the large, integrated oil stocks that are trading at their all-time record highs on the stock market. But the stock isn’t expensive, with a current price-to-earnings (P/E) ratio of 8.7. The company has about $11.00 a share in cash and a price-to-sales ratio of around one. Its long-term stock chart is below:

CVX Chevron corp stock market chart

Chart courtesy of www.StockCharts.com

Chevron is a member of the Dow Jones Industrials and has an outstanding track record of increasing its quarterly dividends … Read More

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