Oil Stocks: Why Now Is The Time To Buy

This name seems cheap on a production and reserves basis

In late March, I pointed to the extreme reading in the oil-to-natural gas ratio and told you natural gas was ridiculously cheap.

Back then, oil was trading for around $80 a barrel… and natural gas was under $4 per million British thermal units (mmbtu). The extreme reading of 22:1 meant oil was likely to fall… natural gas was likely to rise… or a mixture of both.

Now… almost two months later, we got “a mixture of both.Crude oil has declined to $70… and natural gas has rallied to nearly $4.50. As you can see from the chart below, the ratio is at a “less extreme” reading of 16:1.

The result of this fast move is that many of my favorite natural gas stocks have gained in price, despite the severe stock market weakness. Oil stocks, on the other hand, have been clobbered. Make sure to read Jeff Clark’s essay about this here So what is the trade right now?

Well, remember, commodity traders are usually right in the middle of trends. However, they tend to be wrong at the extremes…

According to data tracked at Jason Goepfert’s excellent Sentimentrader service (www.sentimentrader.com), despite the natural gas rally, large hedge funds still hold MASSIVE short positions against natural gas. This extreme in negativity toward natural gas is actually bullish in the short term… so stay long natural gas.

And oil? The big selloff in oil has left many great oil companies oversold… and now there are some bargains.

I recently crunched data on 88 public oil companies. I wanted to see what was cheap right now on a production and reserves basis. One familiar name popped up in both categories: ConocoPhillips (NYSE: COP, Stock Forum).

ConocoPhillips is a giant, $83 billion major integrated oil company. It’s the seventh-largest major, by market value, in the world. I often describe ConocoPhillips as a “world-class energy hedge fund” because it owns so many assets all around the world. Some of the world’s smartest investors, names like Warren Buffett and George Soros, own huge chunks of it (although Buffett sold a bit of his shares recently).

ConocoPhillips’ production sells for less than $130 per barrel. That’s cheaper than 90% of its peers. Its reserves sell for just $10.81 per barrel… cheaper than 95% of its peers. Its current dividend yield is around 4%. ExxonMobil is another world-class oil stock that has suffered in the past few weeks. Another bargain.

To sum up, natural gas isn’t screaming cheap like it was a few months ago… but the rally has farther to run. If we get a hurricane in the Gulf of Mexico , it could spark a huge rally. And if you’re in the market for a great oil company, the oil decline has presented you with several fantastic bargains.