Oil Returns as Major Indicator of Capital Markets?

February 18th, 2014
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by Mitchell Clark, Profit Confidential

The lull between earnings seasons will soon be here and with the absence of corporate results, trading action can get choppy.

It's still important to follow transportation stocks and the NASDAQ Composite. Transportation stocks have a tendency to lead the broader market, and outperformance from the NASDAQ Composite (compared to the other major indices) signals speculative fervor remains.

Follow up:

The one commodity that's very much back in play in terms of a reflection of investor sentiment is oil. West Texas Intermediate (WTI) has come back to the $100.00-per-barrel level on what looks like speculative betting on better economic growth this year.

There were actually quite a few disappointments in big oil's recent financial results and production is definitely an issue. Both large-cap and small-cap oil stocks have not seen their share prices rise commensurately with oil prices, but some value is finally appearing in this sector.

One company that we looked at previously is Kodiak Oil & Gas Corp. (KOG). This is a Bakken oil play that, until recently, was expensively priced. (See "While Few See It, This Stock Sector Is Getting Risky.")

Kodiak expects to produce 42,000-44,000 barrels of oil equivalent per day (boepd) this year, which represents about a 45% gain over last year. The company's stock chart is featured below:

Kodiak Oil and Gas Corp Chart
Chart courtesy of www.StockCharts.com

Kodiak reports its fourth-quarter and year-end financial results at the end of this month. Junior oil companies may see their fourth-quarter numbers affected by the severe cold in terms of the number of well completions.

While Kodiak may be considered a hold currently, this position is becoming more attractively valued. The company's growth is slowing as it matures, but earnings should still grow some 50% this year.

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Within a sector like energy, investor enthusiasm rotates towards production growth, but oil and natural gas prices are the arbiter. Resource investing is almost entirely based on the spot price action.

While big oil stocks have somewhat slipped out of favor, master limited partnerships have been and continue to be very popular instruments among investors craving the potential combination of capital gains with income in a tax-beneficial manner.

Oil and gas storage and transmission is what I believe to be a top investment theme going forward, possibly even for the rest of this decade.

This is a big, all-encompassing industry with countless ways to play it. Pipeline stocks, for example, can be good moneymakers, and with U.S. and Canadian energy production bursting at the seams, storing and moving those hydrocarbons is a good business to be in. Very often, pipelines don't have commodity price risk; they have fixed long-term contract prices, so a business can predict its cash flow quite easily.

One company worth putting on your watch list now is Chart Industries, Inc. (GTLS). The position has come way off its high, and while it's still pricey, some cyclical underperformance could soon yield an attractive entry price.

This company manufactures precision equipment used for oil and gas storage and transportation. It sells a lot of product to PetroChina Company Limited (PTR).

In any case, oil prices are moving again and it's a bet by the marketplace. Upcoming earnings reports from companies in this sector should show an improvement from the most recent season.

This article Oil Returns as Major Indicator of Capital Markets? was originally posted at Profit Confidential.

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