Time to Go Bargain Hunting in Oil and Gas?
Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A few independent oil companies presented interesting opportunities last week after falling as a result of negative announcements.
First on the list – Apache (NYSE: APA) tanked more than 9% last week after reports that one of its natural gas wells offshore of Louisiana in the U.S. Gulf of Mexico experienced a leakage. Although the leak has progressed since Feb. 4, it only came to public's attention now.
The company has mobilized a relief rig to the location and nonessential staff has been evacuated from the rig, which was drilling the shallow water well. A company spokesperson said the well was properly shut in and rig equipment was working as planned.
Now this does not warrant a sharp decline in the stock price that we saw last week. What has happened is that natural gas from the affected well has shifted to a shallow sand formation at about 1,100 feet below the surface and is leaking from there.
The market's reaction is based more on history than fact. Investors are thinking about the financial impact of a similar accident a few years ago for British Petroleum. However, it appears the market is overreacting in the latest case.
Apache has moved its rig to drill a relief well to kill the affected well in case its contingency operations require such a measure. While there is no doubt this is an area of concern for investors, the company is doing what it is supposed to do by diligently following the Bureau of Safety and Environmental Enforcement (BSEE) guidelines.
It is common knowledge within the industry that gas leaks are usually easier to handle than much more polluting oil spills, especially in shallow waters.
The stock has corrected significantly to come down quite near to its 52-week low. With an increased dividend and forward earnings multiple of just 8, the stock surely looks more attractive now.
In comparison, Forest Oil (NYSE: FST), which also dropped 10% last week, trades at a forward earnings multiple of 17. Forest Oil is arguably a weaker choice for its lack of current profitability. The stock lost recently after completing the sale of its previously announced sale of South Texas properties for net cash proceeds of $307 million.
In a similar instance of investors overreacting, EnCana (NYSE: ECA) lost nearly 8% during the week even after reporting a narrower fourth quarter loss of $80 million, compared with $476 million during the same period in 2011. The fall was due to the company's oil and natural gas liquids production guidance, which is now in the range of 50,000 to 60,000 barrels per day, down from an earlier estimate of 60,000 to 70,000 barrels per day.
The company has been hit by low natural gas prices. This is certainly not a blockbuster stock in the industry but a dividend yield of nearly 5%, coupled with the fact that the liquids growth story will continue to unfold in 2013, makes it an attractive play.
Although no one knows what natural gas will do in the future, the fallout from rig accidents is likely temporary, which could lead to a price recovery from recent falls.
valuewalk 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!
