After less than a year in the $50-a-barrel range, oil prices are headed back down once more and are now less than $45 a barrel again. This price drop has taken the wind out of the sails of many investors who were betting the oil price recovery was here.
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Price recoveries, however, aren't linear. While we may be in a temporary downturn thanks to shale drilling's fast response to growing oil prices, we are still in a period of underinvestment that will likely lead to higher prices and better fortunes for companies down the road. For those ambitious investors, this downturn just keeps the buying window open for a while longer.
With this idea in mind, we asked three of our contributing investors to highlight oil and gas stocks that will allow you to take advantage of this opportunity. Here's why they selected Core Laboratories (NYSE: CLB), Transocean (NYSE: RIG), and Whiting Petroleum (NYSE: WLL).
Going up against a hedge fund giant
Jason Hall (Core Laboratories): In May, billionaire investor David Einhorn caught people off guard when he called Core Laboratories "way overvalued" and went short. Since Einhorn's call, Core's stock price has dropped 11%, and Einhorn says it could fall another 38% before being fairly valued.
Needless to say, it's a pretty ambitious move to bet against someone who has made billions in the market. But at the same time, Einhorn isn't infallible and has made short bets in the past that failed miserably (including shorting Chipotle Mexican Grill years ago).
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And I, for one, think that's likely to be the case for his short bet against Core Lab. While his argument that Core is heavily exposed to offshore drilling is true and that it isn't a "secular growth" stock, it remains one of the more important companies in the oil and gas industry when it comes to resource recovery. The bottom line is that Core Lab's innovation and technical expertise have proven to help producers recover more oil and gas more quickly and cheaply, and that's critically important at any oil price.
Furthermore, Core's business may not be as reliant on higher prices as Einhorn thinks, even offshore. Offshore oil is cost-competitive at lower prices -- but high initial development costs have brought offshore drilling to a standstill in recent years. Even with low oil prices, offshore drilling is likely to start recovering in 2018, and that will be a boost for Core.
Looking at the bigger picture, Einhorn could be "right" over the next couple of quarters as oversupply continues to rock the oil market. But I'm betting its share price is much higher a couple of years from now.
Play the long game
Tyler Crowe (Transocean): Like Jason said, offshore development has quite possibly been the hardest-hit segment of the broader oil and gas industry. Producers, the ones that make the ultimate capital allocation decisions in this business, have elected to either not spend any money at all or to spend that money on faster, easier-to-develop sources like shale. As a result, those oil service and equipment companies that specialize or are heavily weighted to the offshore drilling game have suffered mightily.
Heading into this downturn, Transocean was looking like it could be one of the first casualties of a shake-up in the offshore rig space. Much of its fleet was comprised of older, ineffective rigs that were past their economic lives, and it had a rather sizable debt load that would be hard to handle as revenue dried up.
Thanks to the management of CEO Jeremy Thigpen, though, the company completely transformed itself in the midst of this tough time. The company decided to scrap dozens of older rigs as they rolled off-contract and elected to focus on its fleet of high-specification rigs that can either handle ultra-deepwater depths -- more than 10,000 feet -- or harsh drilling environments like the North Sea. At the same time, it has been chipping away at its debt load and building up a cash pile such that it has about $5 billion in debt.
Today, the company is in a much better position both from a fleet and financial position and is likely ready to handle any more rough seas the oil market will throw it over the next year or two. It is likely going to take a while longer until we see a recovery as shale has kept oil prices low for a while, but this can't last forever and Transocean will be well positioned when demand for offshore rigs comes back.
Massive upside if oil prices come roaring back
Matt DiLallo (Whiting Petroleum): The oil market downturn shook leading Bakken shale oil producer Whiting Petroleum to its core. That's because the collapse in oil prices occurred right after the company unveiled a bold move to buy rival Bakken driller Kodiak Oil and Gas for $6 billion in a deal that made it the region's largest oil producer. That transaction, though, came back to bite the company big time because it added a significant amount of debt to its already stretched balance sheet. That troubling financial situation is a key reason why the stock is down more than 90% over the past few years.
The company, however, spent much of the market downturn shoring up its balance sheet and driving down costs so it could better manage lower oil prices. It has made tremendous progress, having already slashed debt 42% over the past year. Because of that, Whiting was in the position where it could increase spending on new wells this year, which would reverse its production decline. In fact, the company's current budget is double last year's level and should lead to a 23% increase in production by year-end.
There's just one problem with that plan: It requires an average oil price of $55 per barrel to balance cash flow with capex. At the moment, crude is currently $10 a barrel below that level, which means Whiting is on pace to add debt back to its balance sheet. That's not something it can afford to do since the company has $1.5 billion in debt coming due over the next three years. This situation has investors worried that Whiting will continue struggling, which is why the stock has plunged 50% this year.
That said, Whiting Petroleum's stock could bounce back quickly if oil rebounds. That makes it a compelling option for ambitious investors who are bullish on oil prices because they could make a boatload of money if oil cooperates.
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Jason Hall owns shares of Core Laboratories and Transocean. Matt DiLallo owns shares of Core Laboratories. Tyler Crowe owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Core Laboratories. The Motley Fool has a disclosure policy.