3 Oil Stocks Wall Street Is Wrong About

By Markets Fool.com

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Photo credit: Flickr user Clinton Steeds.

Oil stocks have taken a beating over the past year thanks to a big drop in oil prices. However, some oil stocks have been hit harder than their peers simply because Wall Street doesn't like them. Here are three oil stocks that we think Wall Street is wrong to hate as each has more upside than the Street is giving them credit.

Matt DiLallo: Shares of Whiting Petroleum have whipsawed over the past month after rumors surfaced that the company was throwing in the towel and now trying to sell itself. This is just months after it bought Bakken shale rival Kodiak Oil & Gas to create the largest oil producer in that play. Unfortunately, that deal was announced at what turned out to be the top of the oil market. Worse yet, it saddled Whiting with billions of dollars in debt at a time when oil prices, and therefore Whiting's cash flows, were plummeting.

In search of what appeared to be a quick profit investors and analysts cheered reports that Whiting had hired bankers to sell itself as evidenced by the fact shares jumped double digits after the reports surfaced. Investors were hoping the company would accept a buyout deal at a hefty premium to its recent depressed price. However, in the weeks that followed, news surfaced that the company was only looking to sell assets. Then takeover speculation dampened further after the company was able to raise $3 billion in debt and equity to right size its balance sheet. Investors booed this move by sending shares down nearly 30% at one point, forcing the company to issue those new shares at a deep discount.

What investors and analysts in favor of a deal have wrong is the fact that Whiting would be leaving an awful lot of money on the table if it cashed out at the bottom of the market. This is a company whose market cap has been cut by two-thirds since last fall. There's no way a buyer would be willing to offer that much of a premium for the company with the oil price where it is at the moment. So, in accepting a deal Whiting would be shortchanging long-term investors as they'd lose out on the company's upside should oil prices rally in the future. Further, this is a company that might have a lot of debt, but it's in no way in distress at the moment, especially after it was able to recapitalize itself.

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I found myself shaking my head when several analysts slashed their price targets on the company after it raised capital in a move to stay independent. These analysts have it wrong as the company is now in an even stronger position to endure the current downturn and thrive once normalcy returns to the market.

Bob Ciura:BP is an oil stock that Wall Street is wrong about. Currently, BP stands as one of the cheapest of the integrated majors. The stock trades for just 13 times forward earnings and barely above book value. By comparison, peersExxonMobilandChevrontrade for 16 times forward earnings, and ExxonMobil is valued above two times book value. In addition, BP's dividend yield towers above those of its U.S.-based integrated competitors because of its stagnating stock price. At $40 per share, BP yields 6%, while Chevron yields 4% and ExxonMobil yields 3.3%.

I believe Wall Street has punished BP because of two key factors: BP's exposure to Russia, through its significant investment in Russian energy producer Rosneft, and the impact of BP's ongoing civil trial. But BP has received good news on both of these fronts, which leads me to believe Wall Street is being irrational.

First, while analysts were widely expecting BP to lose money from its 19% investment stake in Rosneft last quarter, BP actually earned a surprise $470 million profit contribution from Rosneft in the fourth quarter. Separately, BP stated in its 2014 annual report that a federal judge recently ruled that 3.19 million barrels had spilled into the Gulf of Mexico. This was significantly lower than the government's calculation. This effectively reduced the maximum financial penalty that BP could face, from $18 billion to $13.7 billion.

If these events unfold even slightly in BP's favor, its valuation has room to expand closer to its peer group. Despite its various challenges, BP still generated $32.8 billion in operating cash flow last year. And its $2.52 EPS was more than enough to cover its $2.40 per share annual dividend. For these reasons, I believe Wall Street is too bearish on BP.

One of the most confusing things about oil companies today is that some of them took great pains to protect themselves and even profit from a possible decline in the price of crude. One of the best-prepared companies isDenbury Resources, which specializes in using tertiary recovery methods like carbon-dioxide injection to squeeze more oil out of wells that have already stopped producing from more conventional methods. Like many energy stocks, Denbury saw its share price plunge in the last half of 2014, with the stock falling by as much as two-thirds by early this year.

What many investors were surprised to discover, though, is that Denbury had an extensive book of hedge positions designed to rise in value if oil prices fell. Accordingly, with the huge plunge in crude, analysts now believe that Denbury's hedges alone constitute about a third of the company's overall market capitalization, with a value that rose above $800 million near oil's bottom earlier this year. With these assets at its disposal, Denbury can either maintain the hedges to protect against further declines or liquidate them to use the cash for strategic acquisitions or other corporate moves. In any event, Denbury's foresight certainly makes its share-price drop seem overdone.

The article 3 Oil Stocks Wall Street Is Wrong About originally appeared on Fool.com.

Bob Ciura has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Matt DiLallo owns shares of Denbury Resources. The Motley Fool recommends Chevron. The Motley Fool owns shares of Denbury Resources and ExxonMobil. 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.