Time to Get Back in the Game

 | Jan 27, 2014 | 10:08 AM EST
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For the last several columns, I have been warning about a tsunami of negatives that drove me to recommend cash and light trades. But now that much of the storm has hit the markets -- particularly in the exploration-and-production (E&P) sector where we've enjoyed good results in the past -- it's time to find some stocks to buy, because they are emerging fast.

I have felt that 2014 had borrowed much of its gains from 2013 in January. Chinese and other emerging market data might have been the catalyst, but I believe the 550-point drop of the Dow was on its way in any case. It's something I had been patiently waiting for since mid-December.

On top of this, some negative interim calls and some very bad reports of fourth-quarter earnings in domestic E&P companies have helped to make this sector some of the worst of the worst: horrendous production caused by the storms in West Texas in the last quarter of 2013 have pummeled Permian stars Cimarex (XEC) and Pioneer Natural Resources (PXD), which are two of the bellwethers I like to follow to gain insight into the heat of the sector. Others, such as Noble (NBL), Anadarko (APC) and Apache (APA), have fared even worse.

That's good -- that shows the value again has begun to build in these shares, especially as major sector positives are gaining ground at the exact same time these issues are showing weakness.

First, crude is very strong. West Texas Intermediate (WTI) remains just under $100 a barrel and differentials to European Brent crude are closer to $10, with the basis price to Louisiana Sweet crude down to close to zero. That means that margins for US production are ramping, just as the fourth-quarter reports are delivering all the bad news. The first quarter of 2014 is going to be great.

Second, OECD stockpiles of crude are light -- in fact, they are at their lowest levels since 2003. That should assure a very strong crude price again, regardless of whether the export ban for domestic crude is lifted any time soon. Even if it's not, there are strong indications that we'll need that extra crude here in the U.S. soon. Noble Corp. (NE) told the story of cratering offshore work in its interim report last week -- that tells us that onshore shale crude is the only place to be in 2014.

Of course, it could it get worse before it gets better. I would like to see a hard lower opening followed by constructive market action before I confidently buy positively into a stock for size -- even in stocks that have major value opportunities at work. I have not seen that yet, nor does it look likely today. But the prices I see are really nice for restarting positions in old-friend E&Ps that helped us see monster results in 2013.

What can I say? I'm not afraid to own Noble at $63, or Apache at $82 or Hess (HES) at $86. EOG Resources (EOC) is the play if you like buying strength at $165. Everyone is down on these names, believing that they have left their best results in 2013 and that any further market correction will impact this sector the most.

That's the kind of majority opinion I love to bet against. You might wait until more of these companies report to see the reaction, but I'm thinking you might be too late. The reports will be bad, the production will be down, and, guess what? I think the stocks will rally on the news.

Time to get back in the game. Our patience is about to be rewarded.

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volatility is quite low here, and we could see some downsides here in the short term. ...
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