An Energetic Opportunity

 | Apr 17, 2013 | 4:00 PM EDT
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Materials stocks, commodities, oil -- even the Los Angeles Dodgers -- have been hammered in the past week or so. Crude oil futures have fallen on concerns over slowing global growth and over-supply. It seems the always accurate, non-biased folks at the International Money Fund have lowered their global growth forecasts to reflect what everyone else already knew, and oil traders do not like the news. Oil futures are down again today and I am starting to hear $60 and even $50 a barrel.

Over the years, I have discovered a secret weapon for evaluating oil prices. I am no better at predicting the direction of commodity markets than I am at calling stock prices, but I found someone who is. The Saudi Arabian minister of petroleum and mineral resources is eerily accurate at evaluating the market and over the years. I find that even if there is a temporary disconnect, prices usually find the level the minister thinks is fair. The current minister, Ali al-Naimi, recently said that he thought $100 a barrel was a fair price. An advisor to the minister said that even though forecasts were lowered recently, demand would still grow by more than a million barrels a day. Prices may fall but will come back in line with the Saudi forecast and preferred price level eventually.

I have made no secret about being bullish on oil and natural gas prices over the next decade. We may pay lip service to alternative energy, but it will not take a large percentage of demand until we solve storage and transmissions difficulties. I am confident that we will, but it appears to be a long way off. Until then it is going to take fossil fuels to achieve energy independence in the U.S. and to fuel growth in emerging economies.

If I am right, we are seeing the opportunity in oil and gas stocks this week. Many of them were already cheap on an asset basis and they are getting cheaper. I have been buying select oil and gas names for months and as they sell off, I am ready to add to them in my "stay small and move slowly" scale-buying approach.

Shares of WPX Energy (WPX) have fallen by about 5% in just the past week. This in spite of great news out of its Niobrara Shale wells that could increase the stock's value. In this highly regulated world of shareholder lawsuits and SEC investigations, a corporate press release is usually conservative. But look at the wording of the WPX statement: "This well is demonstrating tremendous strength. It's a large discovery that has significant upside potential for creating shareholder value." The stock trades at just 70% of tangible book value and is a bargain for long-term investors at this price.

Swift Energy (SFY) has seen its stock price fall by almost 6% in the last week and nearly half in the past year. The company is in transition from an offshore Gulf of Mexico production company to unconventional oil and gas company. OS far the mix of oil and liquids is not as high as Wall Street might like with production still 50% natural gas. Given that natural gas prices have improved by more than 100% in the past year the company could end up having the last laugh. Most of the industry has shifter production to oil and natural gas liquids and that should work in favor of natural gas pricing over time. At 60% of tangible book value the stock is a buy for asset based patient investors.

My Canadian picks have not escaped the selloff either. Pengrowth Energy (PGH) has seen its stock price decline over 5% in the past week and Penn West (PWE) has dropped almost 15%. Both suffer from the pricing disconnect between Canadian oil and the rest of the world, but that problem will eventually be solved by rerouting existing pipelines and building new ones to give Canadian producers access to global markets. Both trade at large discounts to book value and have high dividend yields. Management at both companies have made statements supportive of the cash payouts so you should continue to get paid to wait for the value of the shares to be realized.

Oil prices may continue to be under pressure for days, even weeks. I am no better at predicting oil prices than I am any other market, but I am sure the Saudi oil minister has a good handle on the oil market. In the meantime, the oil market dislocation is creating greater opportunities in energy stocks for long-term, asset-based value investors.

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