Dicker and Link: Buy Oil Stocks Now When There’s Blood in the Streets

2014-10-10

NEW YORK (TheStreet) -- There’s an old market adage that goes: "Buy when there’s blood in the streets, even if that blood is your own." It means that you normally find the greatest opportunities when everyone else thinks that things are at their worst. Such might be the case with oil and oil stocks now.

There’s been a market break in oil recently, with prices plummeting under $87 a barrel on Wednesday. But I told Stephanie Link, co-portfolio director of Action Alerts PLUS, that I thought these were mostly panicked selling of positions and not fundamental changes in the supply/demand picture for oil.

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Three factors have been behind the rapid drop in the price of oil: the rapid rise of the dollar, the continuing sharp increase in production from U.S. shale and the perception of a coming Saudi price war. What has made the recent two-day drop of more than $3 so interesting is that none of these factors has changed at all in the last few days. It now seems that the dedicated commodity hedge funds are liquidating positions in advance of redemption requests they are expecting in the rest of the fourth quarter.

When funds begin to liquidate, it can be a messy process because these players are not balanced -- their portfolios are almost entirely long oil and oil futures. When they come to the markets looking to raise cash, they can easily unbalance the price even beyond the most reasonable expectation that the fundamentals would have you expect. This happened to a massive degree in 2008 during the financial crisis and is, I believe, happening again here in less intense form.

Even so, just like in 2008, it represents an opportunity to buy great oil companies at "for sale" prices.

I would avoid the companies that have over-leveraged their balance sheets to explore for shale in the United States because a depressed price of crude for even a few months could spell disaster.

But other, well-financed energy companies that have gotten pummeled recently represent some terrific value for investors who are willing to hold for the long term. I particularly like EOG Resources  (EOG) and Cimarex Energy  (XEC) .

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I talk more with Stephanie about oil and oil stocks in the video above.

At the time of publication, the author was long XEC and EOG, although positions may change at any time.

Follow @dan_dicker

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates EOG RESOURCES INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation: 

"We rate EOG RESOURCES INC (EOG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, good cash flow from operations, increase in stock price during the past year and increase in net income. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

You can view the full analysis from the report here: EOG Ratings Report

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 25 years of oil trading experience. He is a licensed commodities trade adviser. Dan is currently President ofMercBloc LLC, a wealth management firm and is the author of "Oil's Endless Bid," published in March of 2011 by John Wiley and Sons.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts on CNBC,Bloomberg US and UK and CNNfn.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.