Sunday, March 4, 2012

Crude reality of oil, how can it positively impact Apache

Welcome back everyone, it has been a good week break, but time to get back on the school grind once again. While I was home I was doing some analysis, basically noting that we are in a continued uptrend with equities and crude oil. Many economists, analysts and people I follow on Twitter have noticed some interesting patterns. The last time we had the forst two months of the year where we did not close down 1% or more on the day was 1995. That year, the S&P rallied 34%. Not saying this is what is GOING to happen, but something to look at.

Here is the S&P so far for ’12

Notice solid vertical bars denote performance in January and February respectively

Now look at 1995 YTD, similarities?

My take is as I have been saying for a bit now, we may have continued problems short term, it looks as if people investing today are looking far long-term and ignoring what is going on today. They either figure stocks are cheap now and are a value play into the future, or something will happen and they will miss the run-up. My target is sill 1,400 then I think we see some profit taking; correction 5-10%, after that we will probably stabilize, unless there is more unrest in Europe.

As this is happening, we are also seeing crude rally, though demand is decreasing and supply is increasing in the US, one would think gas prices here would decrease, no one can change that but the pattern continues to be up. I will explain later why I think oil companies today are cheap and can really go up from here on this increase in the price of oil.

This week I am looking at a couple of names: Bank of Nova Scotia (Tuesday) and Apache (not till May)

Bank of Nova Scotia (BNS), per Google Finance has 18.6 million customers in more than 50 countries around the world. The Bank has four business lines: Canadian Banking, International Banking, Scotia Capital and Global Wealth Management. In a macro perspective, the Canadian banks are monsters compared to US financial institutions due to one simple event: they did not participate in the buying of Mortgage-backed securities which caused the 2008 financial crisis in the US. These banks are highly regulated by the Canadian Government, so shareholders should not have to worry about much. With equities rebounding this year and the jobs picture beginning to look a bit better than the prior few years, I can expect interest rates to rise in Canada in the near future, in turn garnering in more profits for the banks. This is strictly long term though.

Fundamental analysis of BNS shows that indeed they are pretty solid. Having generated almost 800mm in cash last year along with income being stable around 1.2 Billion, this looks like a pretty safe place to park some money. Their profit margin has gone down from 32 to 27% this year, but they do look to continue to pay a nice 3.75% dividend while you wait.

Fundamental look at BNS:

Technical analysis BNS:

Both above show strong hold/slight buy recommendations.

Comparing BNS to 2 of its mail competitors in Canada, Toronto Dominion and Bank of Montreal, we can see significant underperformance the last year.

Personally, doubtful I will buy but from my perspective looks attractive to own, especially as we approach a strong $56 resistance level not tested since last summer. A break above there on this report will propel this stock forward north of 60, in my opinion.

Next company I want to look at, though the report is not for a couple of months, is Apache. Apache Corporation (Apache) is an “independent energy company, which explores for, develops and produces natural gas, crude oil and natural gas liquids” What got me interested in this company is 1. The recent spike in oil and 2. The bullish look at the charts I have been seeing this past week.

Looking at how closely correlated Apache is with Crude oil and my bullishness on Crude, this chart can really breakout above 120 and they have the fundamentals to do it.
Their profit margin is up from 23 to 27% from their last quarters report, mainly on crude oil prices, they still have a good amount of cash and A/R for financing and new investments, dividend hike could be in the works with share prices approaching highs, and cutting costs. It does seem like this company is on the path to make a good run this year.

Above some valuation trends for Apache, notice how profit margin and gross margin have both increased this past year, also EBITDA/share increased along with decreasing Debt to EBITDA. All positive signs so far.

Notice also P/E very low compared to S&P which is roughly 13, this industry is right now at a discount price/earnings wise relative to the broader market.

Technical analysis on RSI and MACD show a slight bearish case in the sense of this past weeks impact on Crude being down 5%

Here is a look at their competition and how they have underperformed their peers in the past year. Notice how tightly correlated they were with Anadarko Petroleum, even after they have been under fire previously with the oil spill in 2010.

I will also this week look to make a trade in DYN if I can get it at the right price.

Have a good week all! Get at me on twitter @peter_eller10 for more updates!

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