From Frost this morning:
SEASONAL SELL-OFF CREATING A BUYING OPPORTUNITY
· E&P stocks may drift lower as commodity prices moderate, but savvy investors are buying into this weakness.
· Natural gas E&P stocks are over-sold and offer great upside when the stocks rally back in the second half of the quarter.
· A late winter storm could provide a catalyst for multiple expansion back to historic levels.
As the following charts indicate, a sell-off in exploration and production company stocks is common this time of year, and we believe creates an outstanding opportunity to add to portfolios. In particular, we believe that the natural gas related stocks are over-sold in response to the technical correction we predicted would occur following heavy buying late in December. The profit-taking has been fast and furious, and we predict a bounce in the gas-levered E&P stocks and much higher valuations by the end of the quarter. The overall supply/demand fundamentals and earnings visibility are just too great to advise anything else but to buy the group at this time. We believe that the time to take real profits could come in the second quarter, when we predict that the group as a whole will be trading as much as 40% higher than it is at the present time.
Our Frost Index of E&P stocks levered to crude oil is comprised of 15 companies whose production is greater than 65% crude oil. As the graph below illustrates, the last two years have been marked by declining stock values in the first couple of months of the year, typically in response to an expectation for lower demand toward the end of winter. We see a similar pattern developing this year, but we believe that investors will be rewarded this year by a growing confidence in the ability of OPEC to control crude prices. In particular, we like the crude exposure of Triton Energy (NYSE: OIL; STRONG BUY), Murphy Oil Corp. (NYSE: MUR; BUY), and Prize Energy (AMEX: PRZ; STRONG BUY).
Our Frost Index of E&P stocks levered to natural gas represents 20 stocks whose production is greater than 65% North American natural gas. We believe that the recent selling in the group has created a great entry point for investors and we think that every portfolio should be overweight in gas-levered energy stocks in the coming weeks. As the following chart shows, natural gas E&P stocks in our index have sold off harder, earlier in the year, than we have experienced in the last three years. In our opinion, the group is now extremely attractive and we urge investors to buy aggressively in the coming weeks in order to participate in the outstanding upside we envision for the group. We believe that the same seasonal rally that can be observed in 1999 and 2000 will take place later in the first quarter of this year and predict around a 40% increase in stock valuations in the first half of 2001. We believe that a rally of historic proportions could be driven by late winter weather that exacerbates critically low levels of natural gas in underground storage. Our favorite picks in the sector remain Apache Corp. (NYSE: APA; STRONG BUY), Chesapeake Energy (NYSE: CHK; STRONG BUY), Cabot Oil & Gas (NYSE: COG; STRONG BUY), Forest Oil Corp. (NYSE: FST; STRONG BUY), Magnum Hunter Resources (NYSE: MHR; STRONG BUY), Ocean Energy (NYSE: OEI; STRONG BUY), Pioneer Natural Resources (NYSE: PXD; STRONG BUY), and 3TEC Corp. (NASDAQ: TTEN; STRONG BUY).
We also continue to recommend oil service companies including BJ Services (NYSE: BJS; STRONG BUY), Helmerich & Payne (NYSE: HP; STRONG BUY), Santa Fe International (NYSE: SDC; STRONG BUY), Pride International (NYSE: PDE; STRONG BUY), Rowan Co. (NYSE: RDC; STRONG BUY), Marine Drilling (NYSE: MRL; STRONG BUY), Cal Dive International (NASDAQ: CDIS; STRONG BUY), Horizon Offshore (NASDAQ: HOFF; STRONG BUY), and Nabors Industries (AMEX: NBR; BUY). |
