Oil/Energy Stocks

A Congressional Budget Office report summarizes one of the factors that will continue to raise future demand for oil, and that is China. The report states "World oil prices have been rising since 2004, driven in part by the increases in China’s demand for crude oil and refined petroleum products. Those increases were most prominent for the light petroleum products—gasoline and diesel—that are used primarily for transportation. Over the next five years, the pace of growth in China’s demand for oil in general, and for transportation fuels in particular, could be a key factor contributing to further increases in the prices for crude oil and refined petroleum products." Read the CBO report here: http://www.cbo.gov/ftpdocs/71xx/doc7128/04-07-ChinaOil.pdf

The other reason oil prices should continue to rise is inflation. Many governments around the world are awash in debt and many countries are choosing to print more money in order to solve their problems. Most of us have seen and experienced inflation, whereby a loaf of bread, or a gallon of gasoline costs significantly more today than it did 5 or 10 years ago. Inflation coupled with rising demand from China and other emerging market countries is likely to make oil stocks one of the top performing investments for many years to come. Furthermore, the global economy is likely to be stronger one day, and if oil can trade for about $100 per barrel in this economy, just imagine how high it will be when things improve. We believe these trends will lead to much higher stock prices for these companies:

Key Energy Services, Inc. (KEG) provides rig-based maintenance and other services to the oil and gas industry. This company has a strong balance sheet and the stock has a book value of about $7.60 per share. Key is one of the leading oil industry service providers and has annual revenue of about $1.7 billion. Dick Alario, CEO, has extensive oil services experience and joined Key in 2004, after serving as Vice President of BJ Services. This company could be an attractive takeover target for a larger oil services company. Some investors and analysts believe that Baker Hughes (BHI) might be considering a takeover offer for this company because they are looking for acquisitions. Key Energy shares recently plunged to about $8 per share, and this presents a solid long-term buying opportunity.

Catalysts: Rising demand for oil should keep investor interest up for Key Energy shares.

52 week range: $6.52 to $20.77

12 Month Target Price: $14 Long-Term Target Price: $16

Marathon Oil Corporation (MRO) is an independent oil and natural gas exploration and production company. Marathon has projects in the United States, Canada, the Middle East, Europe and other areas. This stock offers an annual dividend of 60 cents per share. Marathon has a very strong balance sheet and around $70 billion a year in revenue. The book value is about $23.79 per share and analysts expect earnings of about $3.50 per share in 2011 and 2012. Marathon is pursuing growth with hydraulic fracturing (also known as "fracking"), in the Eagle Ford Shale project and the company is planning to invest $3.5 billion. The company has set a 5 year plan to focus exploration in the Gulf of Mexico, the Iraqi Kurdistan Region, Poland and Norway. MRO shares became incredibly cheap in the recent market correction when they dropped to about $20 per share. This was a great opportunity to buy and we would continue to buy more on any dips close to that level. Read more about Marathon and their Eagle Ford Shale project here: http://www.marathonoil.com/News/Spotlight_Series/Eagle_Ford_Emerges_as_Premier_Play/

Catalysts: Rising oil prices have helped to lift Marathon shares. These shares are undervalued and should rise when market fears calm.

52 week range: $19.13 to $54.33

12 Month Target Price: $30 Long-Term Target Price: $40

Tesco Corp. (TESO) provides a variety of products and services to the oil and gas industry. This company generates about $463 million in revenues annually. Tesco derives revenues primarily from these services: top drives (manufacturing and maintaining top drives), tubular services (which enables casing in the well bore), and casing drilling (this allows an oil or gas well to be drilled using well casing pipe). Tesco Corporation was founded in 1986. Tesco shares recently dropped after reporting earnings that missed expectations. However, the long term outlook is solid for this company and profits should improve in the coming years. Tesco has a great balance sheet with about $48 million in cash and no debt. The strong balance sheet and low share price could make Tesco an attractive buyout target for a larger oil services company. The book value is about $10.44 per share, so any opportunities to buy this stock below $11 should be considered.

Catalysts: Rising oil prices and improved earnings. Tesco could also be a takeover target.

52 week range: $10.01 to $23.39

12 Month Target Price: $18 Long-Term Target Price: $25

McDermott International, Inc. (MDR) provides construction, engineering, project management, and other services to the oil and gas industry. McDermott was established in 1923 and has major projects in Latin America, Asia and operates in more than 20 countries. A new engineering and consulting subsidiary was recently established by McDermott in Saudi Arabia. This company has a strong balance sheet and the stock has a book value of about $6.92 per share. McDermott shares recently plunged below $10 per share due to weaker than expected earnings. This was a great opportunity to buy aggressively for the long term and these shares look cheap on any dips below $11 per share. With the stock still trading around 50% below the 52 week high, this company could be an attractive takeover target for a bigger company like Halliburton (HAL).

Catalysts: Rising oil prices, improved earnings, plus this company could be a takeover target.

52 week range: $9.34 to $26.14

12 Month Target Price: $17 Long-Term Target Price: $21