Back to the Bakken

 | Jul 15, 2013 | 9:00 AM EDT
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Oil is one of the few commodities that have held up strong and posted a good year so far in 2013. West Texas Intermediated oil has moved up some 20% over the last year and is now solidly over $105 a barrel.

WTI has also narrowed the spread with Brent substantially over the last few months, so little differential remains between these two oil benchmarks. This has played havoc with refiner stocks, most of which are down significantly over the last few weeks. On the bright side, WTI's recent rise has been a nice tailwind to domestic energy producers. Two of my smaller Bakken exploration and production concerns, Triangle Petroleum (TPLM) and Emerald Oil (EOX), are both up better than 20% over the past six weeks.

Two larger players in this shale region that I like have not had as exaggerated moves as these smaller players but the higher WTI prices bode well for their equity performances as well.

Hess (HES) is a much larger exploration and production concern with substantial holdings in the Bakken. I have liked and have owned the shares since the low $50's  when activist fund Elliott Management took a significant stake in this underperforming mid-major.

The stock shot up some 40% in the first quarter but has been fairly range bound since then. In addition to high oil prices, the stock should be buoyed by the increasing amount of cash Hess plans to return to shareholders over the next few years. The company plans to buy back some $4 billion of stock and increase its dividend 150% to 25 cents per share quarterly.

The company is shedding non-core assets to focus more on developing production on its most promising domestic assets as well as returning additional cash flow to shareholders. It is in the process of selling its retail marketing businesses, Bakken mid-stream assets, petroleum terminals and Asian assets. It should receive between $6 billion to $8 billion for these asset divestitures. JP Morgan went to "Overweight" from "Neutral" last week and raised its price target to $84 from $73 a share. I think that price target is a good "bogey" if the company executes well on its asset sales and oil prices remain strong.

Continental Resources (CLR) is the largest leaseholder in the Bakken shale region and one of the original "fracking" pioneers. Whereas Hess is attractive for its renewed focus on production and restructuring, Continental is a pure growth play. The company announced in May that production was running more than 40% above the previous year and that oil now made up better than 70% of overall production.

Earnings should be up by more than 50% this year and analysts project better than a 30% gain in FY2014 to almost $7 a share. Consensus earnings estimates for both fiscal years have been moving up recently as well.

On average, Continental has been able to increase earnings at a 20% annual clip over the past five years.  Current investors are getting that growth for a just little more than 13x FY2014's consensus earnings.

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