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

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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.
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