3 Top Domestic Oil Plays

10/17/2011 9:30 am EST

Focus: STOCKS

Peter Staas

Managing Editor, Capitalist Times and Energy & Income Advisor

The past year has been quite a ride with this trio of domestic producers, and the stocks are in great shape once again to add to your energy portfolio, writes Peter Staas of Personal Finance.

A little over a year ago, we highlighted three US-based oil producers that stood to benefit from increased interest in onshore fields after the Gulf of Mexico spill effectively halted activity in this prolific offshore region.

But the wheels started to come off the bus in early summer, when the EU sovereign debt crisis and a slowing US economy raised concerns about the sustainability of oil prices. The stocks we profiled were also hard-hit in the sell-off that followed Standard & Poor’s downgrade of the US government’s credit rating.

Some of this weakness also reflects the divergence between the price of West Texas Intermediate (WTI) and Brent crude oil. Whereas the price of WTI tumbled roughly 34% from its high in late April to its recent low of about $76 per barrel, Brent crude oil has declined by only 21% to its recent low of $100 per barrel.

This anomaly stems from local supply conditions at the physical delivery point in Cushing, Oklahoma. Rising US imports of Canadian oil, higher domestic output from North Dakota’s Bakken Shale, and an uptick in ethanol production have prompted pipeline operators to add new lines or reverse the flow of existing lines to carry crude south to Cushing and other refinery centers.

When an influx of crude oil overwhelms refining capacity, stockpiles build, and the price of WTI declines. This logistical logjam can only be resolved by the construction of new pipelines to move crude oil from Cushing to the Gulf Coast.

But the three independent oil producers from last year are still trading at compelling valuations that offer plenty of upside.

EOG Resources (EOG)
EOG was one of the first major independent producers to shift its capital spending away from natural-gas shale fields, in favor of areas rich in crude oil and natural-gas liquids.

The share of liquids in EOG Resources’ total output has steadily increased in recent quarters, and that trend is set to continue—80% of the firm’s 2011 capital spending plans target oil and liquids.

Management projects that the company’s natural gas output will remain flat in 2011, while its liquids production is expected to surge 47% year over year. The company estimates that nearly three-quarters of North American revenue will come from oil. Buy EOG Resources.

Occidental Petroleum Corp (OXY)
This company reported second-quarter output growth that fell slightly short of management’s estimate—largely because of the structure of its production-sharing contracts in the Middle East.

Under these agreements, the company’s share of the output decreases when oil prices rise and increases when oil prices decline. This enables the company to earn a relatively stable rate of return.

Management expects the firm to grow its monthly domestic production by 3,000 to 4,000 barrels through the end of 2011. Occidental also has extensive operations in Libya, and may benefit from recovering production in the country over the next few quarters. Buy Occidental Petroleum.

Whiting Petroleum Corp (WLL)
This driller boasts over 500,000 acres in the oil-rich Bakken Shale. Although the firm operates in established areas, management has also amassed over 220,000 acres in the Lewis & Clark prospect in the North Dakota counties of Golden Valley, Billings, and McKenzie.

Thus far, the wells in these peripheral areas have generally produced solid test results. Buy Whiting Petroleum.

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