"Buy when there's blood in the street." - Legendary 18th century British nobleman and member of the Rothschild banking dynasty - Baron Rothschild, in reference to buying assets when everyone is selling.
At a time when oil and natural gas prices have declined sharply, it also represents an opportunity to make a killing by acquiring good stocks at today’s depressed prices.
Oil Hits a Road Bump on Economic Slowdown Concerns, Swelling Inventories
After a strong rally in the earlier part of the year that saw prices jump more than 50% to a nearly six-month high, oil has encountered a speed breaker.
Last week, the commodity hit the lowest settlement level since January. The Jun 5 closing of $51.68 put WTI down 22% from its Apr 23 high of $66.30, officially meeting the definition of a bear market.
While black gold has come out of the bear market, prices continued to be threatened by economic concerns and inventory overhang.
Analysts and industry watchers are worried over the worsening U.S.-China trade spat that could lead to a major slowdown in global economy and translate into weak demand for the commodity.
The supply picture is starting to weaken as well. Per the U.S. Energy Department, domestic oil inventories have generally trended higher since mid-March. In fact, stockpiles have expanded in eight of the last 11 weeks and are up nearly 44 million barrels (or 10%) during the period.
On a further bearish note, production rose to 12.4 million barrels per day – the most since the EIA started maintaining weekly data in 1983. This has refueled concerns that the domestic supply glut is cancelling out cuts from OPEC and its allies.
Natural Gas Plunges to Multi-Year Lows
Meanwhile, natural gas futures touched fresh three-year lows recently after U.S. government data revealed a weekly injection in domestic stockpiles that was much more than expected. The commodity dropped to a new low since June 2016 at $2.305 per MMBtu. Natural gas is now 38% down from its Jan 15 high of $3.722 per MMBtu. The latest rise in inventories puts total natural gas stocks at 1.986 trillion cubic feet (Tcf) - 182 Bcf (10.1%) above 2018 levels at this time.
While the fundamentals of natural gas consumption continue to be favorable, record high production in the United States and expectations for explosive growth through 2020 means that supply will keep pace with demand. Therefore, prices are likely to trade sideways but for weather-driven movements. Also, with the traditional withdrawal season (when supplies fall on heating demand due to cold weather) having ended in March and predictions for a cooler early summer, consumption is likely to decline in the near term.
Time to Start Building Positions
Despite being under the pump lately, there are investors who see the commodities’ recent slump as a temporary event and decide to build or increase their position in oil and natural gas-related companies.
The U.S. crude benchmark received a boost with settlement of the trade dispute between the U.S. and Mexico. Indications that the output caps by major oil producing countries will continue beyond June, is also a positive for the commodity.
On the other hand, natural gas is set to gain from the secular shift to the cleaner burning fuel for power generation globally and in the Asia-Pacific region in particular. As it is, higher consumption from industrial projects will likely ensure strong natural gas demand.
Opportunity Knocks for Intelligent Investors
Now for that awkward business of actually selecting the companies.
One of the ways to get it right is to select beaten down stocks. Stressed valuations do not always indicate that the stock has lost all potential. In fact, some could actually make a great buy. But prospective investors need to do adequate research before betting one’s hard-earned money on such stocks.
Often, the herd mentality of investors compels them to dump stocks hovering around their year-long lows. However, the rationale that goes against this view is that stocks might have tumbled over the past due to varied reasons, be it company-specific or macroeconomic.
We have selected 5 stocks that are trading near 52-week lows. In particular, we have taken current price as a percentage of the 52-week high-low range under 10 (a value of 0 indicates that the stock is trading at its 52-week low).
A favorable Zacks Rank #1 (Strong Buy) or 2 (Buy), which justifies a company’s strong fundamentals and potential to overcome the current headwinds, further adds value to these stocks.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Montage Resources Corporation MR: An oil and gas exploration and production company primarily focused on Utica and Marcellus Shales in eastern Ohio, Montage Resources currently has a Zacks Rank #1. Over 30 days, the Irving, TX-based company has seen the Zacks Consensus Estimate for 2019 and 2020 increase 26.1% and 6.7%, respectively. It's now trading just above its 52-week low at $6.78.
WPX Energy WPX: WPX Energy is an independent oil and gas operator whose primary assets are spread in North Dakota’s Williston Basin and the Permian’s Delaware Basin. The 2019 Zacks Consensus Estimate for this Tulsa, OK-based company represents some 366.7% earnings per share growth over 2018. Next year’s average forecast points to another 111.9% growth. WPX Energy, whose shares are trading close to its 52-week low of $9.89, has a Zacks Rank #2.
Encana Corporation ECA: Encana is a leading North American oil and natural gas exploration and production company. The upstream operator focuses on three key growth areas - or its Core 3 liquids plays - namely Permian, Anadarko and Montney. Sporting a Zacks Rank #2, this Calgary, Alberts-headquartered company’s expected EPS growth rate for three to five years currently stands at 6.4%, comparing favorably with the industry's growth rate of 6.2%. Encana's shares are now within 5% of their 52-week low.
EnscoRowan plc ESV: EnscoRowan is a leading supplier of offshore contract drilling services to the oil and gas industry. The 2019 Zacks Consensus Estimate for this London-based company represents some 9.1% earnings per share growth over 2018. Next year’s average forecast points to another 40.7% growth. EnscoRowan, whose shares traded at a 52-week low of $7.48 in yesterday's session, has a Zacks Rank #2.
Approach Resources Inc. AREX: An independent energy explorer and producer with a focus on the unconventional properties in the Permian Basin in West Texas, Approach Resources has a Zacks Rank #2. Over 30 days, the Fort Worth, TX-based company has seen the Zacks Consensus Estimate for 2019 and 2020 increase 8.6% and 33.3%, respectively. It's now trading just above its 52-week low.
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Eclipse Resources Corporation (MR) : Free Stock Analysis Report
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