Drilling for Oil Winners

11/07/2013 8:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

US oil production reached a 24-year high, and continued robust volume growth is likely, as favorable oil prices have spurred investment in US projects, forecasts Richard Moroney, editor of Upside Stocks.

And while the energy sector has handily outpaced the broad market over the last decade, several oil-related factors point to further upside for selective investors:

  • Shale drilling is a game changer. Production and estimated oil reserves have outstripped expectations since the surge in horizontal drilling and fracturing began two years ago.

  • US oil production is on a historic upswing. For full-year 2013, production is expected to climb 15%, on top of a 15% increase last year. For 2014, the EIA projects 13% growth. The US has not seen a three-year streak of double-digit production growth since 1905.

Below we review three industry standouts:

Carrizo Oil & Gas (CRZO) focuses on proven shale properties in Colorado, Ohio, Pennsylvania, and Texas. Its Eagle Ford operations, which span more than 50,000 drillable acres in Texas, have estimated oil and gas reserves of 173 million barrels, or about 42% of Carrizo's total.

Quantitatively, Carrizo's Overall score of 96 out of 100 is well-above the average of 57 for exploration-and-production stocks in the S&P 1500.

Carrizo, with a modest P/E of 12, based on estimated 2014 earnings, is being initiated as a Best Buy.

Based in Canada, Gran Tierra Energy (GTE) explores for oil and gas in Colombia, Argentina, Peru, and Brazil. In August, management raised its full-year production guidance, with the midpoint implying 27% growth.

Over the last 12 months, cash flow surged 45% to $1.50 per share. At $0.52 per share, trailing 12-month free cash flow is the highest in company history.

Gran Tierra, earning the maximum Overall Quadrix score of 100, and among the top 3% of stocks for Momentum, Value, Quality, and Financial Strength, is rated a Buy.

Oasis Petroleum (OAS) is expanding its footprint in the oil-rich shale regions of North Dakota and Montana.

It recently agreed to acquire roughly 161,000 acres in the Bakken region for $1.52 billion—a move that will boost the company's total acreage by nearly 50% to 492,000 acres.

The stock's Quadrix Overall score of 99, places it Number Two in its peer group. Shares earn a 97 for Momentum and 98 for Earnings Estimates, helped by better-than-expected results in the last five quarters. Oasis, our Number One pick in the energy sector, is a Best Buy.

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