Drilling Down to Show Wall Street Disconnect

Joel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Natural Gas is the path to bankruptcy and drilling for oil is the way to riches! That's Wall Street's current thought. Plus, don't even get them started about international offshore drillers. This must mean that all natural gas and offshore drillers are down and all stocks with exposure to domestic on-shore oil drilling must be going up.

I am looking to add more oil companies as my long-term natural gas holding Chesapeake Energy continues to disappoint me. The Bakken formation in North Dakota has been the biggest play, but success in drilling has led to difficulties transporting the crude. Now the Eagle Ford formation in Texas is the hottest place to drill as there is better transportation already in place to get the oil to the highest bidder.

Recently I saw Apache (NYSE: APA) and Newfield Exploration (NYSE: NFX) on the 52 week low list and Cabot Oil & Gas (NYSE: COG) hitting a 52 week high, so I set out to see if the current "wisdom" is reflected in the share prices of these three companies.

Cabot -- Bucking the trend

Well this is not right -- here is a company that has over 80% of their production in natural gas and the stock is at an all-time high. Cabot's wells are mainly in the Marcellus Shale in Ohio and Pennsylvania, so maybe the location of their gas is appealing to Wall Street. Their production increased 44% in the last quarter and management announced an aggressive growth of 35-50%, However, the average price they received for their gas decreased by 3%.

Tapping into the trend of looking for more oil, Cabot is working on its 62,000 acres in the Eagle Ford. I see Cabot as a gas driller that is dabbling in oil trading at an all-time high. This combination scares me so I will not be adding Cabot to my portfolio to gain access to oil.

Apache -- Geographical diversity not helping

Apache's oil fields span the globe -- the US is just 41% of their output. Offshore drilling is still an important business for Apache where they drill in the Gulf of Mexico and the North Sea. Egypt is 20% of their output which would worry me as an investor.

They have been building their onshore US drilling and one focus is the Mississippian Lime formation. Unfortunately Chesapeake just sold much of their land in this region for much less than experts expected. It looks to me like Apache is stuck and I would expect Apache to make additional 52 week lows. I have to agree with Wall Street on this one-- Apache is not for me.

Newfield -- Can they become more focused?

Newfield is also an international company as they explore for oil and gas offshore in Malaysia and China. The company has announced plans to divest all their international holdings and focus on the US. I see three positives:

1. In the US they only drill on land.

2. Newfield has holdings in both "hot" areas of Bakken and Eagle Ford (where they have 185,000 acres)

3. Over 80% of domestic production is oil.

So, why then are they hitting a 52 week low? First, the latest quarterly results were below expectations. Second, Wall Street is concerned that Newfield does not have enough money to fund their drilling plan without selling the international assets. The company already has $3 Billion in long-term debt and trades at a debt to equity ratio of 109. Where Wall Street sees problems, I sense an opportunity. Yes, the debt level is high, but the debt matures between 2018 and 2024. Their main line of credit matures in 2016 and they have a total of $1.3 Billion available to draw down. The 2013 drilling plan calls for $1.7-1.9 Billion in capital investments which would need to be funded from cash flows, borrowings from their credit line and sales of international assets. Since operating cash flows have been over $1 Billion every year since 2009, it looks like they do not need the sale of the international holdings to fund their 2013 drilling plan as they can draw down their line of credit.

This looks like a good risk reward scenario. As long as they have the cash flow to fund their drilling program, the company should be a good investment. Famed oil investor T. Boone Pickens just picked up some shares too, so I will keep an eye on Newfield and see how the stock reacts to any news in the coming months. I hope Wall Street is missing this onshore oil opportunity and an individual investor can profit.


Joel Eggerding has no position in any stocks mentioned. The Motley Fool owns shares of Apache. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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