Drilling for Cheap Oil Stocks

Let's not worry about whether "the market" has bottomed or not for one day. Pretty much everything on my screen is green. Who cares about whether this is "the bottom" or not? Enjoy it while you can.

But let's not give up on trying to dig up companies with good earnings momentum trading at below-market multiples. I spent my day drilling for cheap oil stocks. I looked for exploration and production companies that trade at less than six times cash flow and are leveraged, in this case with long-term debt being 50% to 75% of each company's total capitalization.

Here is my thinking. Oil prices stay above $25 a barrel for some time. You buy a bunch of cheap E&P stocks with accelerating earnings. That allows them to pay down debt and increase production at these higher prices. It's a possible triple dip for shareholders. First, you get the earnings momentum. Second, you get lower interest costs via the financial de-leveraging. (They could also buy back stock, depending on how they want to handle their capital structure.) Third, you get increased revenue that allows the companies to explore and increase their proven reserves.

I got the idea for this screen from talking the other day with Gerry Jordan in our Streetside Chat, and with a smart young hedge fund manager here in Manhattan who prefers not to be identified.

Three caveats. Do your own research on these stocks. This is simply a screen that reflects an assumption that oil stays above $20 a barrel. Second, you will want to see which ones are paying down debt the fastest. Also, check to see who has the most long-lived reserves, which requires you to burrow into the company reports and read the sell-side analysts. You want to see average reserve lives somewhere north of five or six years. And finally, there are certainly others out there. Looking at these names should lead you to them.

Some of these companies are tiny, like Bellwether Exploration (BELW), an independent oil and gas driller with reserves in the U.S. and the Gulf of Mexico, with a market cap of about $100 million.

Others are pretty big, like Kerr-McGee(KMG), which has a market value of about $6.3 billion. A few have international exposure, like Pioneer Natural Resources (PXD), which has operations in not only the U.S. and Canada but also in Africa and Latin America. (Jordan has owned Pioneer, as he has Grey Wolf (GW).)

Check them out. See what you think. Let me know.

Leveraged Oil Plays Thirteen exploration and production companies for your consideration
COMPANY NAME	PRICE PER SHARE 10/18/00	52-WEEK HIGH	52-WEEK LOW	PRICE TO CASH FLOW	% OF LT DEBT TO CAPITAL	EARNINGS LATEST QUARTER	EARNINGS CURRENT QTR VS YEAR AGO
BELLWETHER EXPLORATION(BELW)	7.50	11	3	2.3	0.74	0.27	1.96
COMSTOCK RESOURCES(CRK)	11.5625	14	2	5.3	0.63	0.25	7.96
CANADIAN OCCIDENTAL(CXY)	25.25	31	17	5.5	0.61	0.72	-
DENBURY RESOURCES(DNR)	7.4375	9	3	5.9	0.60	0.30	-
EEX CORP.(EEX)	4.6875	7	2	4.0	0.57	-0.05	-0.17
HOWELL(HWL)	12.1875	14	5	3.9	0.71	0.60	0.63
ICO(ICOC)	1.9375	3	1	2.3	0.59	0.04	-
KERR-MCGEE(KMG)	67.6875	72	39	5.0	0.55	2.13	0.80
NUEVO ENERGY(NEV)	19.6250	26	13	4.1	0.62	0.14	5.06
OCEAN ENERGY(OEI)	15.25	19	6	5.3	0.55	0.26	-
PIONEER NAT RESOURCES(PXD)	13.50	17	6	4.3	0.68	0.30	3.34
RANGE RESOURCES(RRC)	4.4375	6	1	3.1	0.74	0.03	-
MERIDIAN RESOURCE(TMR)	7.4375	9	2	3.9	0.58	0.25	1.72
Source: Baseline.

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