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Over the past two days, the crude oil markets have been sort of an enigma, with both international and domestic benchmarks sliding 3% after last week's announcement of additional quantitative easing from the Federal Reserve. When governments and central banks adopt measures aimed at increasing monetary stimulus, price inflation will ensue and typically commodity prices spring higher. In the oil markets, this strategy played out until the markets were spooked midday yesterday, dropping 3% in less than a minute.
Why the sudden change of heart?
Quantitative easing has slowly been priced into the broad markets after investors followed the bread crumbs the Fed officials left, and although last week's announcement jolted the markets briefly higher, the same harmful GDP threats brought the commodity markets back down to late August levels. With the focus back on European debt worries and increasing uncertainty coming from China about its proposed stimulus, as well as increasing tension between China and Japan, traders are worried that the demand side of the equation will approach a cliff soon.
In additional to diminishing demand worries, the top OPEC oil-producing country in Saudi Arabia is announcing plans to boost oil in order to push international prices back down toward the $100-per-barrel mark.
A sharp decrease in crude prices will bring down with it a number of oil and gas companies, and this brief dip was no exception. A brief pullback can be a good time to take advantage of companies on your short list, and here are two that were valuable before the drop and present even better opportunities now.
Magnum Hunter Resources (NYSE: MHR )
Magnum Hunter was down 5.88% today, but this drop pales in comparison with the 20% rise the company has experienced over the past three months. The story here starts with Magnum Hunter's leaseholds in the oil-heavy Bakken/Three Forks formation, where the company has amassed 132,000 net acres of 95% liquid-yielding land, in addition to 26,000 net acres of Eagle Ford assets in South Texas.
Of course there are companies with a larger portion of the Bakken pie, including Continental Resources (NYSE: CLR ) , which currently is the largest leaseholder in the area with 1 million net acres, but Magnum Hunter offers a value proposition as well as a growth plan. The market currently values the company's proven reserves on EV/BOE of proven reserves at $22 per barrel of oil equivalent. In addition, Magnum Hunter still has 321,000 net acres of undeveloped land and a track record of increasing proven reserves by 150% each year since 2008.
Kodiak Oil and Gas (NYSE: KOG )
Another Williston Basin company that offers an attractive growth story and spilled 4.5% the past two days is Kodiak. Unlike Magnum Hunter or SandRidge Energy (NYSE: SD ) , this company is not currently trading at attractive valuations, but it makes up for it by continually posting triple-digit production growth in oil heavy locales. Kodiak's production growth is staggering, with an expected exit rate of 27,000 BOE per day for 2012 from an entry level of 12,000 BOE/d as well as a large number of undeveloped acres. With enough liquidity to get the company into 2013, Kodiak could be a great find as it increases cash from operations, but investors need to look out for a prolonged drop in oil prices, which could quickly derail Kodiak's plans.
Foolish bottom line
Decreasing crude prices are always a worry when investing in oil and gas E&Ps, but a great way to hedge the risk in this volatile industry is by finding extreme value plays with huge upside potential. I briefly discussed SandRidge Energy as a value play, but this company also has a solid plan in place to develop its vast resources at extremely low costs. This company is well on its way to being a huge success in the following years as it grows its cash flows and organically supplies its capital expenditure budget. For more information on this company, just click here for a detailed premium report on SandRidge Energy, as well as free updates every time important news affects the company.