As oil prices continue to fall, I have been scouring the market looking for potential bargains. I am not a macro guy, but I think that T. Boone Pickens probably knows as much about energy and energy prices as anyone on the planet. When he suggests that oil prices will return to triple-digit prices sooner than most expect, I think we have to pay attention to him. Real Money's own Dan Dicker has been trading energy for over 25 years so when he says that oil prices will recover in time, I also have to consider his point of view carefully.
This week, I have been focusing on stocks that can benefit from the eventual recovery in oil prices. I have been doing this long enough to realize that the current atmosphere in oil is pretty negative and these stocks could easily go down further before recovering. However, with crude oil prices down 30% over the past year, it is clearly time to start buying select energy stocks.
I spent a good deal of time yesterday afternoon going back through the most recent batch of 13-F filings to see which stocks the smartest and most successful investors in the world thought were bargains before the current decline in the sector. I focused on the older guys who have been around a long time and had likely considered the possibility of lower oil and gas prices in their valuation scenarios. I find that age and experience tend to create a larger focus on the margin of safety.
Michael Price has been around a very long time and has had a great deal of success running mutual funds . For the last 13 years he has run a hedge fund that has a great deal of his own money in it. He bought some energy stocks in the third quarter of the year and its worth revisiting some of his picks.
Price purchased shares of GulfMark Offshore (GLF) before the oil prices began to decline and the stock has gotten a lot cheaper. GulfMark provides transportation and support services to the oil and gas industry. The company has an 80-vessel fleet whose ships operate in the North Sea, Southeast Asia and the Americas. Business may be weak for the company as drilling activity slows, but this is now a very cheap stock.
The shares are trading for less than 70% of book value and the company's balance sheet is in pretty good shape. The debt-to-equity ratio is .49 and the current ratio is 2.5, so it appears to have the ability to keep the lights on until conditions improve. A sustained downturn in oil prices may impact the company's ability to maintain the dividend. But, right now, the shares yield 3.76% so investors are getting paid to wait for oil prices to improve and drilling activity to pick up.
Price also purchased shares of SandRidge Energy (SD), which I consider to be more of a long shot. The company has more than 4,300 producing wells and proven reserves of more than 430 million barrels of oil in the U.S. shale fields. However, the company also has a lot of debt and it had to delay its 10-Q filing due to concerns related to CO2 deliveries under a long-term contract with Occidental Petroleum (OXY). It is very much a high risk/high potential reward stock at its current price.
There has been some interesting buying in this stock. In addition to Price, Citadel, D.E. Shaw, Omega Advisors and other well-known advisors were buying shares. In the third quarter, institutions bought 77 million shares of SandRidge. Only 25 million were sold, so there was a huge addition by the big money. There were several insider purchases in the quarter. The company itself was buying back stock and repurchased 3.5 million shares at average price of $4.99 per share.
The math is pretty simple. A sustained period of oil prices below $75 per barrel are going to hurt shale producers in general and Sand Ridge, in particular. The company has more than $5 billion of total debt, including roughly 3.2 billion of long-term debt. If oil prices stay below $70 they may well have financial problems. If oil prices recover, then SandRidge shares will double or more in short order.
Going back to the 13-F filings to see what the older, wiser players are doing in energy stocks can give us a decent shopping list of potential long-term energy winners.