Buying on the Oil Pullback

 | Sep 27, 2012 | 10:00 AM EDT
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Oil has had a rough few weeks in the market. The benchmark West Texas Intermediate crude price is down some $9 a barrel, or 10% since Sept. 14. It also closed below $90 a barrel for the first time since Aug. 2. Although I don't like what this price action might be saying about the strength of the domestic economy, I agree with T. Boone Pickens that near-term downside is probably around $85. The price should be supported by the reaction to QE3 and recent economic reports that show strength. Stocks in both in the oil services and oil producers have fallen some 5% just in the last few trading sessions and have fallen in line with the decline in oil prices since mid-September. This looks like a good opportunity to deploy some new money in the sector as these stocks should pop back once the decline in oil prices arrests itself. Here are two stocks that have had 10% pullbacks and appear cheap at current levels.

Superior Energy Services (SPN) provides specialized oilfield services and equipment to serve the production and drilling-related needs of oil and gas companies.

Four reasons SPN is cheap at less than $21 a share:

  • After falling 10% in last two weeks and down 30% from its highs in the second quarter, the stock is cheap at just 81% of book value and less than 8x forward earnings, a discount to its five-year average (11.6).
  • The mean price target by the 12 analysts that cover the stock is $29, some 40% above the current stock price.
  • The company has more than doubled operating cash flow in the last three years and SPN sells for just over 5x OCF currently.
  • The stock has one of the lowest five-year projected price/earnings/growth ratios (0.38) in the sector and Standard & Poor's has a three-year earnings CAGR of 35% for Superior.

Occidental Petroleum (OXY) is the smallest of the domestic oil "majors" and is active in both oil and natural gas exploration and delivery.

Four reasons OXY is a solid value at $85 a share:

  • After falling some 10% over the last two weeks, the stock is selling at 11x earnings and 7x operating cash flow.
  • Occidental has an A-rating balance sheet and a 2.5% dividend yield. More importantly, the company has increased payouts at better than an annual 16% clip.
  • OXY is expected to triple current revenue growth to 6% in 2013 as new production comes on line and stock is selling in the bottom third of its five-year valuation based on price/earnings, price/cash flow, price/sales and price/book ratios.
  • The median price target on OXY is $112.50. Credit Suisse has an Outperform rating and a $114 price target on the stock.

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



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