Two Promising Stocks for the New Oil Pricing Paradigm

NEW YORK ( TheStreet) -- Like a fleet-footed dark horse coming from 10 lengths behind, West Texas Intermediate (WTI) crude is almost neck-and-neck with Brent International (BI) oil prices.

Up to a few short months ago there was usually a $10 to $20 per barrel spread between WTI, aka Texas light sweet, and its international rival BI.

As Jim Cramer announced on his CNBC show Monday, "The spread is dead" as WTI is just slightly below the price of BI. Those companies that produce WTI and ship oil to customers are likely to benefit.

One WTI producer that sports a share price below $10 is Kodiak Oil & Gas ( KOG). KOG is a well-situated oil and gas exploration and production company.

KOG established itself as a significant player in the Bakken Shale, one of the best areas to produce oil in the U.S. It recently added to its footprint there by purchasing the rights to 42,000 acres, which increases its presence in the Bakken by 27%.

On Tuesday, KOG announced preliminary unaudited operational and financial results for the second quarter that ended June 30. At the same time, it announced updated proven reserves quantities and provided a Williston Basin operations update.

Kodiak reported average daily sales volume of 23,200 barrels of oil equivalent per day (BOE/d) for the second quarter of 2013. This represents an 83% increase over sales volumes of 12,700 BOE/d for the second quarter of 2012, and an 8% increase over first-quarter 2013 sales volume of 21,700 BOE/d.

Take a look at this potent report and accompanying charts that reveals the increasing amount of production growth KOG has experienced from the same quarter a year ago.

With WTI at $107, this is very significant. At current net production of approximately 34,000 BOE per day, consisting of approximately 28,500 BOE per day from legacy production and 5,500 BOE per day from recently acquired properties, its revenue and earnings per share numbers should soar.

As I suggested in an article last month, KOG may still be a takeover target.

Even if it isn't acquired anytime soon, its latest reserves update should bring a smile to the face of any savvy investor.

As of June 30, and pro forma for the July 2013 acquisition, Kodiak had estimated proved reserves of 123.9 million barrels of oil and 120.7 billion cubic feet of natural gas, or 144.0 million barrels of oil equivalent (MMBoe).

The company's reserves are comprised of 86% crude oil and 14% natural gas. The June 30, 2013 proved reserves (prior to the addition of acquired reserves) reflect a 28% increase over year-end 2012's proved reserves of 94.8 MMBoe.

KOG's management reveals its second-quarter revenue and EPS numbers on Aug. 1 after the market closes. Twenty-two analysts whofollow KOG are estimating an average increase of EPS of 40%!

For the third quarter they anticipate a whopping 54% increase in EPS over the year-ago quarter. Revenue for the second quarter is estimated to be up around 118% and over 126% for the third quarter.

This one-year chart speaks volumes and takes into account the key revenue and EPS metrics for KOG.

KOG Chart KOG data by YCharts

KOG is definitely a volatile stock which traded below $7.50 per share in April 2013 and now stands above $9.40, more than a 25% gain in less than three months. Within a year I expect the share price to be near $12.

Another Beneficiary That Offers a Dividend

WTI crude is called Texas light sweet because of its superior quality. It is oil with low density and is called "sweet" because of its low sulfur content. It is prized around the world and is now richly priced.

With WTI crude at $107 per barrel it makes good economic sense for producers to sell it to oil-hungry nations overseas. It also makes it possible for international producers of Brent crude to sell and ship their oil here to the States.

That bodes well for ocean-going oil tankers and the companies that own them.

One that is currently in the spotlight is Nordic American Tankers ( NAT). NAT is in the business of acquiring and chartering double-hull tankers.

Its current fleet consists of 20 double-hull "Suezmax" tankers all employed in the spot oil market. The board has announced that it plans to grow NAT into a larger company in the tanker market business.

NAT "at all times will evaluate market opportunities and employment options to enhance the value of NAT and its dividend capability," according to a statement. NAT plans to continue its generous dividend-paying policy.

In fact, on July 9 the company announced the board had declared a dividend of $0.16 for the second quarter, the same as for the first quarter of 2013.

The record date is July 31 and the payment of the dividend is expected to take place on or about Aug. 13. This was the 64th consecutive quarter that NAT has paid out a dividend.

The share price of NAT went north by nearly 9% on Tuesday on seven times the average daily volume as investors awoke to the reality that its 64 cents-per-year dividend offers a 6.5% yield even with the price as high as $9.85.

NAT is one of the floating fleets of oil tankers who will be busier than ever now that the price of Brent crude is not much higher than WTI. It'll likely be bringing more Nigerian oil our way and any overseas nation that wants more of our Texas light sweet can have it shipped to them by NAT.

The company steps into the earnings confessional on Aug. 5 and the current estimate among analysts for EPS is that it will be down about 30 cents per share from the year-ago quarter. That's partly why this sailor is in no rush to buy shares of NAT quite yet.

Here's a one-year chart for you "home-gamers" and you'll appreciate why this giant, double-hulled whale of a tanker company won't be shooting out the revenue or EPS lights right away.

NAT Chart NAT data by YCharts

The Aug. 5 earnings report should be very telling. Although the average analyst's estimate on revenue and sales growth for the quarter is calling for a drop of over 27% the news won't be all bad.

It wouldn't surprise me if the company guides higher for the current quarter. Analysts are already predicting an estimated increase in this present quarter of an impressive 30% to 34%!

When the analyst community was crunching the numbers for NAT earlier in 2013 few could see the day that the spread between WTI crude and Brent International would narrow down to almost nothing. If that spread doesn't widen by much it will be a game-changer for the oil tanker business.

On Monday Jim Cramer gave NAT a giant boost on "Mad Money" and shares of NAT traded as high as $10.25 on Tuesday. That's an effervescent move of over 19% from last Friday's intraday low price of $8.59.

If you don't own any NAT yet it may be wise to let the froth settle down and see how the earnings news plays out. If shares cooled down closer to Monday's high price of $9.22, the yield-to-price would be 6.94%.

Over the next 12 months I think shares of NAT will trade near $13 if not higher. As of March 31, the book-value-per-share was $11.94.

From my standpoint, the biggest obstacle for NAT is that as of March 31 it was shouldering $250 million of debt with less than $24 million of total cash. That ratio needs to change drastically over the next 12 months.

Cramer and other analysts may be correct. The crude oil spread may be dead, and if that reality persists it will be good news for KOG and NAT as the year progresses.

At the time of publication the author was long shares of KOG.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ¿herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.


More from Opinion

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Throwback Thursday: Intel Edition

Throwback Thursday: Intel Edition

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

Wednesday Wrap-Up: GE and Facebook

Wednesday Wrap-Up: GE and Facebook