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Occidental Petroleum Corporation (OXY), Kodiak Oil & Gas Corp (USA) (KOG): A Proposed Oil & Gas Portfolio

Published on July 22, 2013 at 11:17 am by The Motley Fool in News
Oil has been one of the very few commodities that weren’t affected by the broad-based downward adjustment in commodity prices. While the CRB industrial metals index is down by 9% year to date (ytd), Brent crude is down by only 4%. As a matter of fact, oil prices might continue to outperform the rest of the commodity markets. I find two main reasons:
  1. Oil prices have been underperforming leading indicators (the US ISM new orders index is picking up) and
  2. The renewed period of political instability in Egypt (0.9% of global oil supply in 2012).

Here I will propose a portfolio with my three best oil and gas equity ideas.

Strong balance sheet and fair valuation.

Occidental Petroleum Corporation (NYSE:OXY) is one of my favorite oil and gas picks among US producers. The company’s production being 70% oil and Natural Gas Liquids (NGLs) makes it much less dependent on gas prices than most of its large exploration and production (E&P) peers.
Occidental Petroleum Corporation (NYSE:OXY)’s strong balance sheet (its net debt is just below 0.4 times EBITDA) and strong capital discipline makes it a great and safe bet to take advantage of the shale revolution taking place in the US (which, according to Harvard University, shall be the largest oil producer by 2017). Besides,  the company trades at a very reasonable 12.75 times P/E and pays an above-average 2.85% cash dividend yield. I would invest 55% of my three stock portfolio in Occidental.
Kodiak Oil & Gas Corp (USA) (NYSE:KOG)

One pure shale play.

Kodiak Oil & Gas Corp (USA) (NYSE:KOG) is the pure play to own in the Bakken oil shale in North Dakota, thanks to its high leverage to oil, which accounts for over 85% of Kodiak Oil & Gas Corp (USA) (NYSE:KOG)’s production and reserves. According to its strong well results, the company has the most attractive acreage position in the basin. Moreover, the future should look even brighter. Drilling efficiencies, increased availability of services and ameliorated infrastructure in place (primarily increases in rail capacity) should continue driving down well costs, and hence, improving economic returns.
Kodiak Oil & Gas Corp (USA) (NYSE:KOG), which is still expanding its acreage fast, trades at 12.8 times P/E and pays no dividend (I would expect dividends to start being paid in two to three years). I would invest 25% of my three stock portfolio into Kodiak.

One pure value play.

Petrobras Argentina SA ADR (NYSE:PZE) is probably the cheapest oil company in the world. The company has a strong balance sheet (net debt equals 0.4 times EBITDA), huge growth ahead (thanks to its shale reserves) and trades very cheaply. On the other hand, it has huge possibilities of being an M&A target.

Petrobras Argentina SA ADR (NYSE:PZE) is 67% owned by Petrobras Brazil and the state-owned Brazilian oil giant has already expressed its interest into selling a significant share of its Argentinean subsidiary to concentrate the company’s efforts in Brazil’s off-shore plays. Most importantly, the energy policy in Argentina is now, after over a decade, changing for the best. Very recently, the government has liberated exports of the oil coming from shale reserves and eased taxes for companies investing in the country’s rich shale reserves (believed to be one of the world’s biggest).

Operationally, the company is also performing extremely well, with revenues and EBITDA increasing by 6% and 31% year over year (yoy), respectively, due to solid performance from the E&P segment (+27% yoy) and higher margins. Trading at 4.6 times P/E and paying a 3.83% cash dividend yield, I believe Petrobras Argentina should be 20% of this portfolio.

The Foolish portfolio

This Foolish portfolio is composed of 55% Occidental Petroleum Corporation (NYSE:OXY), 25% Kodiak Oil & Gas Corp (USA) (NYSE:KOG) and 20% Petrobras Argentina SA ADR (NYSE:PZE), and pays a 2.33% cash dividend yield with a great growth profile thanks to Kodiak Oil & Gas Corp (USA) (NYSE:KOG) and Petrobras Argentina SA ADR (NYSE:PZE). I assigned 55% of the portfolio to Occidental Petroleum Corporation (NYSE:OXY) because I consider it a great and growing low-risk, high-quality asset.


Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article A Proposed Oil & Gas Portfolio originally appeared on Fool.com is written by Federico Zaldua.

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