Four Stocks to Buy on an Oil Decline

 | Aug 07, 2013 | 10:00 AM EDT
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All commodities have been facing downward pressure this year. Aluminum, copper, metallurgical coal and iron have all been hit by oversupply and have declined. Steel has been in a glut for years, and gold has not been spared, either. Natural gas got hit in 2009 and has only recently begun to recover -- prices are still very low. Potash fertilizer has until very recently remained above the fray, but the breakup of a major cartel in Belarus has finally knocked this down, too.

That leaves oil. Only oil has managed to stay up at 2010-to-2011 levels. Oil companies are just as richly valued, as well, with many of these stocks making frequent new highs. Will oil follow in potash's footsteps and join the rest of the commodities crowd? If so, some of these stocks could be coming down as well. Today I have four oil producers on a "wish list." All of them are recognized for their excellence by the market, and are trading near new highs.

Let's first look at ConocoPhillips (COP). The company has been on a tear lately, having made real progress on its turnaround as it engages in higher-margin, politically stable, growth-oriented plays. Only recently has Wall St. recognized Conoco's progress, and so the stock is near its 52-week high. Conoco's yield is still higher than those of its peers, and it offers a growing dividend, to boot. In fact, last week management raised its quarterly payout another 4.4%. Conoco is a lean, cash-throwing machine. If oil drops significantly, it should be among the first you consider.

Next are a mid-cap and a small-cap. Both are in U.S. shale resource plays, and each is very concentrated in its respective shale.

First is the mid-cap, Gulfport Energy (GPOR). This company has the most liquids-rich position in Ohio's Utica shale -- and, unlike the No. 1 producer there, Chesapeake (CHK), Gulfport has a strong balance sheet with no need to deleverage. It has used legacy Louisiana assets as a sort of cash cow to fund efforts in the Utica. So, instead of selling acreage, Gulfport is buying. Its production is slated to almost triple this year as a result of these efforts.

Then there's Sanchez Energy (SN). This company is a pure play on a premier U.S. shale, the Eagle Ford. As with Gulfport, Sanchez has a strong balance sheet with little debt. Also like Gulfport, this year Sanchez will be growing oil production by triple-digits.

Shares of both Gulfport and Sanchez are at their respective 52-week highs. Shale oil is here to stay, and I believe these two offer the best small- and mid-cap opportunities.

Fourth is a much bigger shale player, EOG Resources (EOG). EOG is a major player in the Bakken, and it is the biggest producer in the Eagle Ford. It also has a sizable position in the Permian Basin, and is evaluating unconventional acreage in the Wolfcamp shale there.

EOG stock is at a multiyear high, and it's there for a reason. The position in the Eagle Ford is probably the strongest and oiliest. When considered together with the Bakken assets, EOG is the strongest shale producer out there. Shale oil production will still be profitable even with much lower oil prices. So, when oil prices drop, EOG should be at the top of your shopping list if you like oil companies.

Again, oil has managed to stay high even despite the drop in other commodities. But demand is declining in the U.S., China is decidedly slowing down and new shale production is coming online. As a result, oil may be joining the rest of those commodities on the downside. If that happens, be ready to buy these four names. All of them have margins that are either superior or improving, and they will all do well in a lower-price environment. Keep a look out for them.

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