For weeks the buzz was that oil couldn't rally -- despite whatever bullish news was thrown at it. Now it's that oil can't go down, despite some relatively bearish indications coming in. We've been on fire with our oil stocks, picking up huge value from where we bought shares. But for those who haven't been on the bandwagon, are there any values left to be had? Perhaps one: Anadarko Petroleum (APC). I will get into why in a bit.
First, a clear overview of the oil market is critical before deciding when, and where, to position oneself on oil stocks. We know that hedge funds have been crowding into a long oil trade recently, making most any news bullish -- that's the power of the financial input on oil prices. But bearish news has been coming in, too --like the Saudi's threat to raise production another 2 million barrels a day to swamp out Iranian exports.
I had thought that global increases from Iran, the Gulf of Mexico and threats from the Saudis would be sufficient to send oil prices back down to a value level, where we'd get the chance to reload on a few midterm oil-stock plays -- I had specifically recommended Devon Energy (DVN), Continental Resources (CLR) and Hess (HES) for this. But oil won't cooperate. The longs refuse to let go of oil, as they refused to let go of shorts in February. We're likely to hit $50 before we swoon again.
We've enjoyed some great gains on EOG Resources (EOG), Cimarex (XEC) and some others -- so good, in fact, that I don't have one share of stock that I bought higher than any of my oil plays are trading today (save for some Cimarex shares I bought at $115).
But we know that a lot of these gains are premature -- even in an oil market that I think will reach $60 by year end and go well over $100 by the end of 2017.
With all this money in early chase of the oil trade, is there any value to be found? If you didn't accumulate oil stocks as oil drifted below $40, have you missed the opportunity completely? Perhaps not.
One group that I would not recommend are the shale players that have consistently plowed ahead with production increases throughout the bust: companies like Pioneer Natural Resources (PXD) and Concho Resources (CXO). There is too much that can go wrong on the march back towards $100 a barrel, and names like these, which are already lofty, will be the first to suffer. Names like Continental and Hess, in my view, are also way ahead of themselves in the cycle, and they are no longer at a level to be bought -- at least not right now.
But now, let's look again at Anadarko, which had, on first glace, a terrible earnings report earlier this week. Anadarko has been the most snake-bitten of oil companies, with its disaster in the Gulf of Mexico in 2010 being the first major bite. But really, every new endeavor it undertakes seems to face more than its usual share of challenges: Look at the recent speculation on the company's massive, offshore Heidelberg project, speculation that is suspiciously now less enthusiastic after two test wells in phase one.
Adding to the weight on shares, CEO Al Walker has become unnaturally conservative in recent months, confirming he won't increase capital expenditure (which is down 50%), even if oil goes above $50 -- and probably will not utilize hedges unless it gets above $60.
But Walker has an ace in the hole -- one that potentially gives him outsized earnings power in an oil market that gets to that level. It's his accumulation of IDUCs (intentionally drilled, uncompleted wells), scheduled to reach 170 by the end of the year, in the firm's Niobrara and Eagle Ford shale holdings. Like someone pinching pennies and hiding them in a closet, Anadarko has been using its savings on dividends, and limited capex to generate this unseen but huge potential resource.
We've read the stories of old penny pinchers dying and their heirs finding millions of dollars in saved quarters stashed in pillowcases and closets: Anadarko is pursuing the same strategy, just waiting for that inevitable day when it can unleash this ready resource onto the oil markets.
Anadarko shares have seriously lagged the sector. Conservative production combined with the snake bites have left APC out of the premature rush for oil stocks -- and perhaps left some value for investors. Pioneer was a $220 stock now trading close to $170. Cimarex was a $140 stock already trading at $115. Continental has doubled in the last two months. EOG is nearing $85. But Anadarko, a solid $100 stock, is still below $50 a share.
I think the bad report is an opportunity for investors who have yet to add some quality energy shares to their portfolios. It is far from the best, but probably the best remaining value out there. I am recommending Anadarko Petroleum at $47.
