5 Oil and Gas Stocks That Should Bounce Back

The five-day carnage on the Street starting last week saw the Dow Jones Industrial Average plunge a whopping 4.14%. The most obvious conclusion is that the market is undergoing a correction following a three-month rally that started at the turn of the year.

Tried-and-true strategies
But some believe that this might not be the case. Investors who relied on strategies that worked in the past might not be able to reap similar gains this time. While there is merit in the above conclusion, this isn't necessarily applicable to every industry. For instance, the average drop last week for nearly 200 stocks in oil exploration and production was about 5%. Now this kind of a drop, I believe, may have been overdone. With crude oil trading at $103 per barrel and no obvious signs of a shortfall in crude oil demand, exploration and production companies with strong fundamentals should inevitably recover.

Here are five exploration and production stocks that, I believe, should make a strong recovery following last week's thrashing:


Samson Oil & Gas (ASE: SSN) : The stock fell more than 14% in one week. And the move by the market might be justified. This is a company whose cash outflows are currently greater than its inflows, thanks to substantial capital expenses and barely any profits. But what the market might have missed is this: Samson is developing its reserves in the Bakken, which should substantially add to production this year. Once this happens, I expect much stronger cash flows. In simple terms, it's an up-and-coming exploration company and its current situation doesn't really surprise me.

Occidental Petroleum (NYS: OXY) : This stock fell almost 6% in one week and is currently trading near $88. However, according to S&P Capital IQ estimates, the stock is expected to pull up to $118. Now that's a real opportunity ahead. But I'm not too surprised. Occidental has been patiently exploiting the California shale plays with a single-minded focus on increasing shareholder returns. The company has an uncanny ability to allocate capital so as to achieve returns that are well above the cost of capital. Domestic production hit a record high in 2011 at 449,000 barrels of oil equivalent per day -- a figure that should go up this year.

McMoRan Exploration (NYS: MMR) : This stock received a 12% hammering and now trades near $8.60. Analysts at S&P Capital IQ have a price target of $16. McMoRan's expectations are built around the Davy Jones wells. However, initial flow tests were hindered due to an equipment malfunction last month, which saw its shares plummet 15%. That drop was followed by last week's carnage. In all, McMoRan saw its market cap shaved off by 34% in one month. However, the good news is that in its latest update this week, the company successfully completed all activities for the flow test with only commercial production remaining. 2012 could define this company.

Penn West Petroleum (NYS: PWE) : This stock fell 3.90% last week and now trades near $17. Analysts have a price target of $28. This Canadian exploration and production company has access to one of the world's largest reserves -- the Athabasca oil sands. The income trust turned corporation is currently developing the prolific light-oil plays in Vikings, Spearfish, Carbonates, and Cardium. Currently, Penn West is among the largest light oil producers in Canada. I'm looking at a solid production hike this year. This dividend stock looks fundamentally sound.

Ultra Petroleum (NYS: UPL) : I've reserved the last spot for the underdog. This natural-gas producer has been through bad times, with the stock losing 60% of its market cap in the last 12 months. Natural gas, at $2.00 per Mcf, isn't really profitable for any company. Ultra has a low cost structure, which could help it stay afloat in the current environment. Fellow Fool Dan Dzombak pointed out that while most natural-gas producers are getting crushed due to high production costs, Ultra has been a low-cost producer at $2.82 per Mcf. This is where the company has a distinct advantage over its rivals.

And natural-gas prices aren't going to stay at current levels for a long time. Dan points out that demand will eventually rise. Prices in the range of $5 to $6 per Mcf will be hugely profitable for Ultra Petroleum. Analysts have put a price target of $32 on this stock, which is currently trading around $18.

Foolish bottom line
These companies have sound business fundamentals, which is what makes me bullish about them. Eventually, that's more important than short-term market-driven sentiments. However, if you're looking for one energy stock, we've got a stock idea that could knock your socks off. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects. It's free for a limited time, so click here today.

At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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