The average U.S. price of gasoline jumped 18 cents a gallon in the past two weeks due to rising costs of crude oil and related concerns about tensions in the Middle East, although supplies of fuel remained plentiful in most of the country, according to the Lundberg Survey.
The national average cost for a gallon of regular gasoline rose to $3.69 on Feb. 24, according to the nationwide survey of gasoline stations.
To capitalize on the higher gas price, CNBC’s Jim Cramer says oil and gas drilling companies are shifting away from natural gas and focusing more on oil. The Lundberg Survey suggests the price of gas isn’t likely to fall anytime soon, so Cramer thinks these companies may enjoy increased profits for some time.
Given the continued shift to oil, Cramer thinks select oil and gas names can be bought on dips. Click ahead for his preferred plays.
By Drew Sandholm with Reuters
Published 29 February 2012
When this story was published, Cramer’s charitable trust owned Apache, ConocoPhillips and Schlumberger.
Devon Energy engages in the acquisition, exploration, development and production of oil and natural gas. Although based in Oklahoma City, it currently owns oil and gas properties across the U.S., including the Permian Basin in Texas and New Mexico, the Rocky Mountains and elsewhere. Executives decided that it’s the right time to look for additional oil prospects and the company has a new find that’s being kept under wraps, Cramer says. If it’s big enough, this latest discovery could move the needle for the stock, he adds.
Headquartered in Houston, Magnum Hunter Resources is an oil and gas drilling and exploration company. The company is currently split between 51 percent oil and 49 percent gas, but is focusing more and more on the oil business. In an interview with Cramer, CEO Gary Evans said his company is drastically increasing output and basically transforming itself into a “drilling factory.” In its most recent quarter, the company delivered a 455 increase in production. It was also able to increase reserves by 44 percent in just sixth months’ time.
Cramer thinks this is a very risky stock, though, because small players like this can get hit with funding problems. So he can only recommend it on a speculative basis.
Oklahoma City-based SandRidge Energy is also seeking to profit from higher U.S. gas prices. The oil and gas drilling and exploration company is increasing production and acquiring additional oil properties, Cramer says.
Cramer had been ambivalent on SandRidge’s stock lately, but after the company reported strong earnings last week, he’s recommending it again. He praised CEO Tom Ward for his execution.
EOG Resources is “one of the most undervalued oil companies on Earth,” Cramer said. It was the top producer in the U.S.’s two largest domestic reserves: the Bakken shale in North Dakota and the Eagle Ford shale in Texas. Cramer thinks EOG’s Eagle Ford properties are worth more than the price of the whole company.
Not only is EOG one of the largest oil and natural gas companies in the U.S., it also has proven reserves in the Canada, China, Trinidad and the U.K.
Continental Resources has a major presence in the Bakken shale, an oil rich region that stretches from western North Dakota to eastern Montana along the Canadian border. The Bakken could be the largest domestic oil find in nearly 50 years, according to CEO Harold Hamm. In turn, Continental is trying to turn North Dakota into the U.S.’s largest oil producing state outside of Texas.
Apache is an independent energy company based in Houston. It engages in the exploration, development and production of natural gas, crude oil and natural gas liquids. Cramer thinks it has lots of growth potential, and he expects its stock will continue to push higher.
For investors who like to play it safe, Cramer recommends ConocoPhillips. He considers Conoco one of the most shareholder friendly companies, as it boasts a 3.5 percent dividend yield, and has executed meaningful share buybacks.
The Houston-based company is also unlocking value for shareholders by breaking itself up, Cramer said. Conoco is spinning off its downstream refining and marketing business while keeping its faster growing exploration and production business, he said.
The world’s largest oil service company, Schlumberger is also the biggest beneficiary of the huge increase in oil production lately. After all, exploration and production companies have increased their capital expenditure budgets by 30 percent over the last two years, Cramer said.
Schlumberger fits into every part of the oil service business, but Cramer likes that it gets 80 percent of its sales from outside of the United States. In other words, it has less exposure to the weak natural gas business, unlike some of its competitors. It has a 60 percent market share in the lucrative deepwater drilling services business.
As oil companies continue to ramp up production, Cramer thinks Schlumberger could see earnings growth of 30 percent next year. With the stock currently selling at 14 times next year’s earnings estimates, Cramer thinks SLB is a “steal” at current levels.
For investors who can stomach risk, Cramer points to National Oilwell Varco. The Houston-based company is the leading maker of oil rigs, as well as associated drilling and production equipment. It enjoys a 70 percent market share in this area.
What makes this stock risky is that rigs are expensive, long-term investments, so the company needs oil prices to stay elevated for longer periods of time to see the demand tick up. The longer oil drillers think oil prices will stay elevated, the more likely they are to buy oil rigs from National Oilwell Varco.
With the price of gas on the rise, Cramer thinks U.S. politicians will finally embrace natural gas as a transportation fuel. After all, President Barack Obama spoke positively about nat gas during a recent speech at the University of Miami.
“We’re launching a program that will bring together the nation’s best scientists, engineers and entrepreneurs to figure out how more cars can be powered by natural gas – a fuel that’s cleaner, cheaper and more abundant than oil,” Obama said.
To Cramer, the change in attitude toward nat gas will only help Westport Innovations. The Vancouver, Canada-based company designs natural gas-powered engines. While WPRT is one of Cramer’s favorite speculative plays on nat gas vehicles, some investors may be concerned because its stock has run up lately. It climbed by 20 percent year-to-date and by 263 percent since Cramer first recommended it in January 2010. JPMorgan downgraded it recently because it thought the stock was too expensive.
Cramer still thinks the stock could go higher, and argues that the nat gas vehicles market is big enough for multiple players.
As gas prices climb, Cramer thinks U.S. policymakers may soon embrace the possibility of natural gas as a transportation fuel. Not only is nat gas considerably cheaper than gasoline or petroleum, it’s also 30 percent cleaner than petroleum and of great abundance in the United States, Cramer says.
Obama had long supported battery-powered electric vehicles, but now seems to entertain the idea of powering American cars with natural gas instead of petroleum. Obama first mentioned natural gas during the State of the Union in January.
If Washington is becoming friendlier to nat gas, it could be good news for Clean Energy Fuels. The Seal Beach, Calif.-based company designs, builds and operates natural gas fueling stations across the country. It’s building a nat gas superhighway along the U.S.’s major trucking corridors.