“Hillary Clinton — Best President Ever?” (Deciphering Matt Badiali’s oil stock teaser pitch)

Looking at the stocks teased by S&A Resource Report's "The Absolute Best Way to Invest in America’s Tight Oil Boom" pitch

By Travis Johnson, Stock Gumshoe, October 22, 2014

Matt Badiali and the folks at Stansberry Research are very skilled at using the names of politicians to inspire visceral reactions in readers and get them to read their ads or listen to their sales pitch presentations.

Which is, of course, the point — and it doesn’t even really matter which politician’s name they use, as long as it’s polarizing and it gets attention. They probably lean a bit to the right in trying to scare us about liberal politicians, since they know that the core audience for investment newsletters are old rich white guys who have a decent amount of money, which itself is a group that leans right, but over the years they’ve been perfectly willing to get your attention by slamming George Bush or Mitt Romney as well.

This time around, it’s Hillary Clinton — and Matt Badiali’s pitch gets our attention by saying that she’ll got down in history as the Best President Ever.

Which is quite a prediction to make, even before she has declared her candidacy for an election that’s two years away, but you read this far… right?

The real claim they’re making — and they’ve been doing this for years — is that whichever politician is running the show when America pushes past the tipping point into dramatic growth and prosperity because of our increasing oil production will be called the “best president ever”… it’s just that Hillary Clinton is the current frontrunner. Matt Badiali’s boss, Porter Stansberry, made similar arguments a couple years ago in saying that Obama will get a third term and a glorious legacy because of LNG exports.

It’s not that these politicians mean much to the argument, just that saying something inflammatory about them will get your attention…. so we’ll drop Secretary Clinton for now and get to the actual point of the ad… which is that Matt Badiali wants you to subscribe to his S&A Resource Report, and if you do he’ll send you a special report about the stocks you should buy to benefit from the huge production of shale oil/tight oil and the coming “Reckoning Day” when the real focus turns from importing oil into America to exporting it out.

Then we get a dozen pages of argument about how shale oil is huge and important, and the volumes produced are ridiculous, and no one really gets it yet — that may be true, though Americans are certainly noticing now that gasoline is tickling $3 a gallon again, but I know you get it. Investors have been slobbering over Bakken and Eagle Ford oil for years now… so what are the investments Badiali is teasing? In his words:

“One thing I believe you absolutely must do is own what I know to be the five (5) best tight oil boom companies in America.

“The best companies to own right now are smaller names that have perfectly positioned themselves on the eve of America’s Reckoning Day.

“These are little-known giants whose equipment, technologies, expertise, and resources EVERYONE in this space uses…

“Their services will become more and more critical in the months to come. And their revenues will continue to skyrocket.”

So that’s the basic spiel — what are the actual stocks he’s recommending? We get a few clues about several of them, so we’ll just run through ’em in order:

“For example, one of these five companies invests more money each year in Research & Engineering than all other oilfield services combined.

“I’d argue that the oil boom could not have happened so quickly and so efficiently without the services this company provides…everything from “dirty hands” stuff like pumping and storage to “clean hand” stuff like imaging and data processing. All the big oil companies call this firmto get a job done, and it’s a stock you absolutely must have in your portfolio.”

That one is almost certainly Schlumberger (SLB), the oil services giant that has a hand in almost everything. Hard to argue against this one, which gets touted every now and then, it’s the real blue chip (possibly accompanied by Halliburton) in the oil service space globally. Other than the depths of the financial crisis, SLB hasn’t traded at a PE below 16 in 20 years — so while it’s not cheap with a PE of about 17-18 right now, it is close to as cheap as this stock typically gets. And they have become an excellent dividend growth stock over the past decade, quadrupling the payout over that time — though, like most dividend growth stocks, the current yield is not high at about 1.7%.

SLB is a mega cap company, with a market cap of about $125 billion, and it is very much exposed to investment by oil companies, so it’s no surprise that they have taken a bit of a hit as oil prices dropped in recent months, but they are not direct producers — falling oil prices definitely hurt their business, but they don’t hit the bottom line directly. And yes, they say they spend more on Research and Engineering than all the other oil services companies put together — but they’re also larger than Halliburton (HAL), Baker Hughes (BHI), Weatherford (WFT), Cameron (CAM) and National Oilwell Varco (NOV) combined. If you want oil services, it’s hard to argue against SLB as the most “blue chip” name available in that space — particularly if you can buy it in a downtrend — but it’s unlikely to provide massive overnight gains even if oil spikes considerably.

“Another one of the ‘5 Best’ companies is about to close a deal that will make it the number one oil producer in the Bakken region – the largest oil field in the continental United States. The company will soon operate an area of land larger than the entire state of Rhode Island. Again – this is a company you want to own.”

This one is Whiting Petroleum (WLL), which made a deal to acquire Kodial Oil & Gas (KOG) back in July — that deal, assuming it’s approved when shareholders vote in early December (seems likely to me — the big shareholders are already backing the deal), will indeed create the largest producer in the Bakken and it’s expected to boost Whiting’s production by about 50% next year, in addition to giving it access to KOG’s large inventory of drilling locations.

This kind of deal makes sense to me for what is, in effect, an industrial operation — the Bakken guys aren’t really explorers anymore, they’re engineers who are trying to make production as efficient as possible, and having a larger operation can help with that. I don’t know if it will work out or not — investors reacted favorably to the deal after it was announced, but, as with all other oil stocks, they punished the stocks this Fall so both stocks are down by about 30% in the last few months. There was a bit of chatter about the deal being “too expensive” for Whiting, and it does increase their debt as they assume Kodiak’s debentures — but it’s an all-stock deal, so the deal is effectively getting “cheaper” as the price of WLL falls (investors are assuming the deal will close — KOG shareholders will get 0.177 shares of WLL, and that’s within 1% of where KOG is trading now).

The companies we can most easily compare Whiting to are probably Continental Resources (CLR) and EOG (EOG) — Whiting is quite a bit cheaper than both of them by most measures, and it’s likely to have substantially more revenue growth than either thanks to the Kodiak deal… though whether that revenue growth turns into earnings per share growth for the new, larger company depends a lot on how efficiently they integrate their new acquisition and on where the oil price is in 2015.


“I’ve also found the company who operates the largest fleet of power drilling rigs in the world… this special type of rig provides accurate control of both speed and torque. It’s the luxury car of drilling rigs and everyone wants to use it for their projects.”

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Thinkolator sez this is: Helmerich and Payne (HP)

HP is one of the big drilling rig operators, and they are said to have the most advanced power drilling rigs — I don’t know if that’s true or not, or what the distinction between them and their closest competitors might be, but I do like what the company has done over the past year… they’ve become an aggressive dividend growth company, so the yield is now over 3% and they have a payout ratio (the percentage of earnings paid out as dividends) that is still pretty low, in the 30% range. That looks pretty appealing.

Like most of the drilling contractors, they likely had a rough couple of years as natural gas prices dramatically cut demand for drilling equipment — so investors are probably wise to be concerned about where their revenues go if oil prices keep dropping, but with oil at $80 there sure won’t be much of a slowdown in the Bakken, Permian or Eagle Ford so that just means that, as usual, the direct drilling operators like HP, or like the fracking pressure pumping companies who ran through a boom and bust cycle in recent years, will probably continue to be pretty directly levered to oil and gas prices.

If I had to buy a driller, HP would be a good place to start research and I like the current valuation and the newfound focus on returning cash to shareholders — but, like pretty much any name in this space, if you had a 25% stop loss in place and owned the stock in July, you would have sold it by last week.

One more:

“Then, there’s probably my most important recommendation… this company is the largest independent refiner in the United States.

“Remember, our refining capabilities in the U.S. are growing more dire by the day – but this company recently invested more than $700 million in two of their Texas refineries to take on even more tight oil.”

Well, that has to be Valero (VLO). Refiners have been doing pretty well over the last year, especially those who have the best access to mid-continent oil or who have easy export capabilities (refiners have been the only outlet for our surplus in recent years — exporting crude oil is illegal, but exporting gasoline is allowed… refiners can process cheaper WTI Crude int gasoline or diesel or other products and ship those refined products to people in Europe or Asia who are used to prices based on the higher Brent Crude price). Generally speaking, refiners are a good place to be when crude oil prices are falling, since crude oil is their input cost and the prices of refined products (like gasoline at the pump) tend to move more slowly than the price of oil… especially when they’re falling.

There are several large refinery stocks — HollyFrontier (HFC) is probably the most expensive, perhaps because it pays huge dividends (7%+ thanks to special dividends) and Valero is both the biggest and the cheapest by most measures and has been growing its own dividend since 2010 for a current yield of about 2.5% (others to maybe look at, by way of comparison, are Tesoro (TSO), Western Refining (WNR) and Marathon Petroleum (MPC)… or the high-yielding and riskier MLP Northern Tier Energy (NTI), which owns a single refinery in Minnesota and the string of SuperAmerica gas station/convenience stores).

Everything in this space is being MLP-ified (assets being spun off to master limited partnerships to create tax pass-through ownership and appeal to dividend investors), and most of the refiners have jumped on that movement, too, even if only to own their pipeline networks — Valero has one of those, in case you’re looking, in Valero Energy Partners (VLP). Doesn’t yield any more than the parent at this point, but I haven’t looked very closely at the relationship.

And… that’s all we get. So there are four of the five — what’s missing? We don’t get any clues, but I’d imagine it’s probably either a pipeline MLP, an oil-by-rail company, or a refined products tanker company, since “transport” is somewhat missing in this spiel otherwise. That’s just a guess, if you have a favorite stock to throw out in that area, or any opinions about these four stocks touted by Badiali, well, I’d love to hear your thoughts if you’ll share them using the friendly little comment box below.

Disclosure: Of the stocks mentioned above, I currently own shares of National Oilwell Varco. I won’t trade in any of the stocks mentioned for at least three days because of Stock Gumshoe’s trading restrictions.

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October 22, 2014 4:57 pm

Maybe Dakota Plains Holdings, Inc. (DAKP), an oil-by-rail company. I don’t own any stock in the company but it’s on my watch list.

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October 22, 2014 5:29 pm

My guess is Energy Transfer Partners (ETP) with a hand in many facets, including pipelines and refining. Nice growing yield and highly rated among the MLP space. Disclosure:Long ETP