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The Oil Stocks: Cheap or a Value Trap?

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  • (0:30) - Exploration and Production: Oil and Gas Industry
  • (4:25) - Tracey's Top Picks: Real Value or Value Trap?
  • (13:40) - Episode Roundup:

Welcome to Episode #44 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

With crude remaining under $50 a barrel, and skepticism about the recent OPEC deal running strong, investors have been fleeing the energy stocks, especially the E&Ps (“exploration and production”) stocks.

Some have fallen 50% in 2017 and are at new 52-week lows.

A Re-Test of the 2016 Lows?

If you recall, the energy stocks were beaten down in early 2016 as crude fell to new multi-year lows. The energy stocks appeared set to head into the abyss.

But a turnaround in crude prices also resulted in a rally in oil stocks.

Everyone believed the rally would continue into 2017.  Most analysts expected crude to trend higher in 2017 and head into the $60s. That would mean that the energy stocks were also undervalued.

They were wrong. Even with OPEC production cuts, there’s still too much oil on the market as the US shale industry has ramped up production.

The number of oil rigs has nearly doubled in the last year.

But because crude has remained depressed, that means oil company earnings aren’t rebounding either.

Just a reminder, a stock sell-off doesn’t necessarily mean the stock is cheap. Tracey dives in to find out whether these E&Ps are buying opportunities or not.

5 Oil Stocks: Cheap or Value Traps?

1.      Pioneer Natural Resources(PXD - Free Report) is one of the largest E&Ps. Shares have fallen only about 8% year-to-date. It still pays a small dividend and is expected to be profitable in 2017. But estimates are now trending down. Cheap or a value?

2.     Apache (APA - Free Report) is also one of the large E&Ps but its shares are down about 25% year-to-date. While it’s expected to be profitable in 2017, with the Zacks Consensus Estimate calling for $1.08 per share, the estimates are also being cut for 2017 and 2018 by the analysts. Cheap or a value?

3.     Whiting is a mid-cap E&P that drills in North Dakota and Northern Colorado. Shares have taken a pounding, losing 39% year-to-date. It has lost money the last 2 years and is expected to still be losing through 2018. But estimates are trending higher, as analysts expect it to be better than they thought just 90 days ago. Cheap or a value?

4.     SM Energy (SM - Free Report) has a market cap of just $1.9 billion and drills in the Eagle Ford, the Bakken and the Permian Basin. Shares have plunged about 50% year-to-date. 2017 estimates are rising but 2018 are being cut so it’s a missed bag. The insiders were buying en masse in March 2017 as the shares sank. Cheap or a value?

5.     SRC Energy is the smallest of these companies with a market cap of just $1.4 billion. Shares are down 15% year-to-date. It’s focused on the Wattenberg in Colorado, Wyoming, Kansas and Nebraska. While it saw a loss in 2016, earnings are expected to rebound to $0.48 a share in 2017 and are trending higher in the last 90 days. Cheap or a value?

Remember, investors should always look beyond the basic numbers of a company when doing their research.

The oil companies have a lot of debt. With crude remaining depressed, it’s wise to research which companies have the economic firepower to withstand a protracted downturn.

What else should you know about the oil stocks?

Tune into this week’s podcast to find out.

[In full disclosure, Tracey owns shares of APA and WLL in her personal portfolio.]

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APA Corporation (APA) - free report >>

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