What happens if we really have seen a bottom in oil? I don't know many who feel that way. There are still plenty of analysts out there who think the combination of heavy Saudi production, a return of Iran to the market, the stepped-up production of Iraq and the lack of a decline in shale production all add up to dramatically lower prices in the not-too-distant future.
But the market's not stupid. It would have been hit and hit hard already from that parade of horribles. It hasn't. In fact, every time the price dips below $60, buyers rush in to take it right back up. There seems to be a perpetual bid in oil underneath that level and we have to start thinking that perhaps there are some cheaper oil stocks that we need to acknowledge should be bought.
How do we make that judgment? How do we know what might be undervalued?
I think I have a way. You simply have to go back to where these stocks were when oil was scraping along the bottom back on March 16. That's when it took one of those sojourns to the low $40s, quite a ways from the current price.
So let's play it out looking at the major oil and gas independents because those are the ones most likely to be acquired given that, because of the disparity between where the stocks are now vs. where they were, they could represent more value on Wall Street than in the oil patch itself.
Let's start with the biggest dog, ConocoPhillips (COP). Here's a $77 billion stock, down 8.8% for the year, that is being valued at almost the exact same price as it was when oil was $73. It does have a lot of natural gas, but still, you know this one represents a bargain for a Chevron (CVX) or an Exxon (XOM), both of which are big enough to swallow it.
Then there's EOG Resources (EOG), which is only slightly above where it was when oil bottomed. Lots of people have turned on EOG because it didn't have the production growth they expected. That's ridiculous. It didn't want to have it. Unlike so many other oil companies, EOG isn't cash-constrained. It didn't need to pump, so it didn't, choosing to save oil in the ground, basically storing it, for higher prices. (EOG Resources is part of TheStreet's Action Alerts PLUS portfolio.)
How about the off-rumored Anadarko (APC)? It's three bucks above where it was when oil traded well below here. That sure should eliminate some of the downside of this asset-rich company. If someone is going to make a move on Anadarko, do it now.
I know Apache (APA) just got a new CEO, John Christmann, earlier this year, but the price of Apache has gotten downright absurd, a buck and a half below where it traded in March. Pioneer's (PXD) Scott Sheffield has earned the ire of David Einhorn, with the company being scorned as the mother fracker, but off 14 points from where it traded when oil was in the low $40s? Even the bears have to be intrigued.
Finally, there's one with huge assets that just seems totally misvalued: Marathon Oil (MRO). The darned stock is priced at almost the exact same price of the dark days and, at $26, could be swallowed up for well below its peak last year at $41 and even pretty far down from $31 in May. I bet $33 to $34 gets this company.
Now, oil may still go lower, taking all of these stocks with it, but the beauty of this analysis is that you know these stocks found buyers here with oil much lower. Will it really be that hard to find them with oil hovering at $60? Nope, and I think real buyers, other oil companies, might be eyeing these companies, too.