Analyzing Oil Stocks in the Wake of a Rebound

Written by Jason Simpkins
Posted June 3, 2016

Back in November I wrote about the crash in commodities prices, especially oil:

This is like one big Black Friday sale. I'm looking at everything — gold, silver, uranium, copper, soybeans... I saw an article today predicting $26 oil.

Yes, please.

I would love to buy some $26 oil...

Yes, global growth is slow. And it may take some time to eat into the oversupply. But I fully expect the market to reverse course by 2017.

Even if it takes until 2018 or later, I'm prepared to wait. That's because once the market stabilizes, oil will return to $60-$80 a barrel in short order.

As fate would have it, oil did drop down to $26 per barrel, a 13-year low, in January.

Since then, it's bounced back up just as I suspected it would.

Oil touched $50 per barrel for the first time in six months last week. That's a 100% gain in six months.

If you bought in like I did, you're probably pretty excited right now. And rightfully so.

If you didn't, don't worry. It's not too late. The rebound has yet to hit full swing. In fact, it could easily correct to the downside, giving investors another shot a picking up a steal.

Plenty of good investment opportunities abound.

Here's a few I'm looking at now...


Most investors own at least one or two oil majors. That's a good idea.

They're even better bets now that low prices have forced them to tighten up and bolster their balance sheets. Oil companies the world over have cut jobs and spending, renegotiated drilling contracts, and deferred or abandoned costly projects.

Exxon Mobil (NYSE: XOM) has always been among the most popular oil majors.

It's got strong, stable management, name-brand recognition, market dominance, and a global presence. Better yet, it's paid uninterrupted dividends for the past 103 years. And it's raised the payout in each of the past 31 years.

It currently yields 3.4% at $0.75 per share.

Exxon isn't big into shale, so its margins have remained pretty stable despite falling oil prices. Even when times were bad the company was generating $20.55 of net income for each barrel of oil it produced. And every $1 increase in oil prices boosts Exxon's earnings per share by roughly $0.35.

Exxon stock has already enjoyed a nice 13.5% bounce this year.

There are some riskier, but potentially more profitable plays, as well.

Continental Resources (NYSE: CLR) is another strong candidate, but it's riskier because it's a shale play.

Continental is the biggest player in the Bakken. It has a high-quality asset base with higher margins. That's pushed the company's production ahead of market expectations.

Unable to make any money drilling in the Bakken with oil at $30 per barrel, the company turned its attention to the STACK play of Oklahoma, where returns were north of 20%. That figure rises to 60% with oil now at $50.

Continental’s consolidated production for 2015 was 221,700 barrels of oil equivalent per day (BOE/d), up 27% over 2014. And its first quarter production totaled 230,800 BOE/d, up 3% over last quarter and 12% higher than the first quarter of 2015. That exceeded the company's own guidance.

Continental also sold a non-core, non-producing asset in Wyoming for $110 million, shoring up its balance sheet.

Its stock is already up 83% this year, and a lot of that is attributable to insider buying, which is a really good sign.

I'd definitely keep an eye on Continental, especially if there's a pullback in prices.

Now, if oil prices stay high, investors might also consider Whiting Petroleum (NYSE: WLL).

Whiting slashed its capex budget by 80% to just $500 million when oil prices crashed last year. That just about matched its expected cash flow, and allowed the company to complete the wells drilled in 2015.

Of course, that was when oil was at $30 per barrel. At $50 per barrel Whiting expects to generate $1 billion of cash flow this year, double the $500 million it came up with last year.

Keep in mind, though, that Whiting is far more dependent on higher oil prices than a company like Continental or Exxon. The stock is bound to be more volatile, though it is up 35% year-to-date.

Midstream MLPs

Outside of producers, I still really like midstream pipeline and storage companies.

I've been singing the praises of Magellan Midstream Partners (NYSE: MMP), Phillips 66 (NYSE: PSX), and Kinder Morgan (NYSE: KMI) for years.

These companies get paid on the quantity of oil and gas that they move. Obviously, the U.S. rig count has plunged over the past year, hitting the lowest level ever recorded at one point.

But higher oil prices means more production, and that means increased demand for pipeline and terminal services.

Kinder Morgan is a leviathan in the pipeline business, with operating interests in roughly 84,000 miles of pipelines and 180 terminals.

The company got a huge boost this week when it received approval from the Federal Energy Regulatory Commission (FERC) for its proposed Elba Island LNG export plant near Savannah, Georgia. The permit is for the expansion of the existing Elba Island LNG Terminal through the addition of $2 billion in liquefaction equipment.

The firm also announced FERC certificates for $300 million in pipeline expansion work to boost gas supply to the site and to other industrial consumers. That work should be completed towards the end of this year.

Meanwhile, Magellan has 1,600 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of approximately 21 million barrels.

Additionally, it has five marine storage terminals with an aggregate capacity of 26 million barrels. That's beneficial because storage is in high demand right now.

In addition to its crude assets, Magellan has a 9,500-mile refined products pipeline system with 53 terminals. That's key since U.S. exports of refined products are at their highest level in years.

The company topped analysts expectations in the first quarter, even though total revenue of $520 million decreased 2% year over year. With oil prices on the rise, Magellan's operating margin was approximately $100.7 million, up 19% from the prior-year quarter.

The MLP also announced a 12% increase in its cash distribution. It now pays $0.80 per unit, for a 4.4% yield.

The partnership reiterated its annual distribution growth of 10% for 2016. On top of that, for 2017, Magellan Midstream continues to project at least 8% annual distribution growth. Distributable cash flows projection for this year has been increased by $10 million to $910 million by the partnership.

All of these companies will do well if oil prices stay flat, or continue to rise. However, there's more variation in terms of downside risk. Exxon and Kinder Morgan are the most insulated from another dip in oil prices. Whiting is the most vulnerable.

Also don't forget, we recently uncovered a brand new energy play that completely ignores oil altogether. Be sure to check that out.

Fight on,

Jason Simpkins Signature

Jason Simpkins

follow basic@OCSimpkins on Twitter

Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

*Follow Outsider Club on Facebook and Twitter.

Heal Your Ailing Portfolio Body