Large Draw in Inventories Has Crude Oil in Focus

Wednesday, September 29, 2010

The large, greater-than-expected draws shown in today's crude inventory data is spurring a powerful rally in the energy sector. The Department of Energy reported a draw of 475,000 barrels v. -250k expectation in crude oil. Gasoline and distillates were even more surprising with expectations for build ups in inventory yet data showed -3.5 million and -1.3 million barrel draws, respectively. Crude oil and gasoline are up over 2% and heating oil has gained almost 3% today.

I picked up a few names this morning to profit from the possible move higher in crude and the expected rotation into the energy space. In particular, I like Schlumberger Limited (SLB), Tidewater Inc. (TDW) and Concho Resources Inc. (CXO).

Quick fundamental and technical stories:

Schlumberger (SLB) is the most expensive name of my three companies trading 16 times forward. But, SLB is perhaps the best stock to own in the oil space as a dominant player in exploration and production of petroleum products with the most advanced technologies. The company derives over 4/5ths of its revenues from international business giving it significant exposure to growing economies even if the developed world is in the "new normal". SLB does not have a clear cut technical pattern besides the double bottom at $54 which should be a nice springboard for higher prices.

Tidewater Inc. (TDW), a provider of offshore vessels and marine support services, is trading at the low end of historical valuation at 9 times trailing earnings. While the stock is currently trading at $44.50, TDW boasts a book value of $48.15 per share. With low debt and a 23% profit margin and 92% of revenue from international operations, TDW has the opportunity to recover nicely with heightened demand for crude oil. Technically, share have been basing for months and may be ready to run having cleared the $44 level.

Concho Resources (CXO) is an exploration and development company of oil and natural gas fields in the Southwest United States. While shares are trading 26 times trailing earnings, the company is expected to grow 50% per year over the next five years giving it a PEG of just 0.5. Shares at at 52-week highs, a rarity in the oil space, and are clearing the $65 level which may bring in technical buyers.

Brandon R. Rowley
"Chance favors the prepared mind."

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