It's no secret that oil stocks have been crushed. As a contrarian, I like this, because some are starting to look pretty attractive. I don't know where oil is going, but sheer valuations in some of these stocks look good right now. Who knows? Maybe it's a value trap, but the way I see it is that oil is a finite resource, and there are no substitutes for gasoline at the moment. Buying these stocks when they're this depressed is worth it.
Within the oil sector, the stocks that have gotten hit the worst are the companies that are doing exploration and production (E&P) in shale oil. They're in the Bakken and other parts of North Dakota. Some are down 40%, 50%, 60%, or more.
I've put together a list of five companies that are heavily into North Dakota. They are Continental Resources (CLR), Oasis Petroleum (OAS), Whiting Petroleum (WLL), Kodiak Oil and Gas (KOG), and Triangle Petroleum (TPLM).
They were all profitable up until their last quarter, which for most ended in September, or early November for the latest. Crude was trading around $95 at that time, and it has since fallen about 30%.
The key questions as to whether or not you should buy these stocks are: can they make money when crude is down at $65? Do they have enough cash on hand to service debt?
What I did was construct a very simple spreadsheet that looked at total full-year revenues, expenses, the net position (P/L), and cash on hand of these companies. All revenue expenses were derived by dropping their current revenues (as reported in their 10-Q SEC filings) by 30%, which is roughly what the crude price decline has been, since their last quarter.
For example, take a company like Oasis Petroleum. Its revenues for the year, if oil remains at $65 per barrel, will be about $1.03 billion. On the other hand, its expenses will come in at around $1.1 billion. The company is going to have a loss of about $67 million. The problem is that Oasis only has about $67 million of cash on hand, which is enough to cover about five months of interest expense, but not enough to cover even one month of operating costs. It's in trouble. I wouldn't touch it.
On the other hand, let's take a look at Continental Resources (CLR). Its revenues for the full year, given the 30% decline in the crude price, will come in at about $4.6 billon. It is a much bigger company, with production not only in the northern U.S., but the South and East as well. Continental's expenses will come in at $3.1 billion, and its profit will be $1.5 billion. No problem. In addition, it has $152 million in cash on hand.
I've summarized the data in a table shown below. All revenue is adjusted for a crude price of $65. Expenses are total expenses, including interest expense. Totals are for the full year, and all figures are in millions of dollars. The pure Bakken guys (OAS, KOG, and TPLM) look like they're in trouble, although TPLM might have enough cash to ride it out.
