Read This Before You Rush Into Oil Stocks

One of the biggest mistakes investors can make is to jump into a good industry "no matter the price." Today, most big-name shale producers are at least fully valued.

Jul 24, 2014 at 1:12PM

The Dow Jones Index is just that: an index. Despite understanding that fact, I still sometimes find myself saying "I'll take another look at selling when the Dow hits X thousand." For me, Dow 17,000 served as something of a reminder that valuations have continued to march upward for the last five years. While the big indices, the Dow especially, do not necessarily show the 'big picture,' they can often serve as simple reminders to step back and look at one's watch list as a whole.

This article will look at an industry that has not only been one of the few bright spots in the American economy, but has also, in some cases, gifted investors with triple-digit gains over just a few years' time. That is the fracking industry.

Over the last five years, independent E&P companies have led the way through the shale oil boom. The companies which bet heavily on the Eagle Ford and the Bakken are generally the ones that have performed the best. 

Of the independent E&P names in the shale, EOG Resources (NYSE:EOG) is the granddaddy of them all, with a market cap of over $60 billion. EOG is the largest oil and gas producer in the Eagle Ford, one of the largest in the Bakken, and is an early mover in both shales. 

Eog Sharp Chart

Chart by Sharp Charts

This charts shows us a small part of the big picture. Since the beginning of 2013, EOG has actually appreciated by nearly 75%, and the company was already a fairly mature one at that time. Right now, EOG trades at 4 times book value, which for an E&P company is fairly high. (Remember, due to heavy depreciation and the highly cyclical nature of earnings, the earnings per share metric are not quite as useful in valuing energy companies.)

Yes, EOG still has growth numbers that would make many tech companies envious, but even EOG's production is beginning to decelerate: Last year the company grew oil production by over 40%, this year growth is expected to be only 29%. 


EOG's closest rival is, perhaps, Continental Resources (NYSE:CLR). If EOG is the the champion of the Eagle Ford, then Continental is the champion of the Bakken, with over 1.2 million net acres there. This year, Continental expects to grow production by an impressive 26%-32%, most of which will be oil. 

Clr Sharp Chart

Chart by Sharp Charts

As we can see, Continental's chart looks pretty similar to that of EOG. Also similar to EOG, Continental has nearly doubled since the beginning of 2013. Looking at valuation, Continental now trades at 6.67 times book value. Despite impressive growth in the shale, high valuations warrant caution right now. Do not let secular growth be an excuse to jump in at any price. 

That's not to say there are no deals left to be had. Look, for a moment, at Whiting Petroleum (NYSE: WLL). Whiting has an impressive 3,700 well locations in the Bakken, and another 3,500 in the Niobrara thanks to a recent acquisition. Whiting may not be growing quite as fast as are EOG or Continental, but a production growth rate of 17%-19% is nothing to write off. 

Wll Sharp

Chart by Sharp Charts

Like the other two, Whiting has jumped quite a bit over the last few months, but unlike the other two, the stock still trades at a reasonable valuation: Price/book value is only 2.65 times. If you're interested in getting into the shale 'while you still can,' Whiting is one of the better choices out there right now. 

Foolish takeaway
While there are still a handful of good values in the shale, most big names are now fully valued at least. One of the biggest mistakes beginning investors can make is to jump into a growing industry at any price. Personally, this was one of the first mistakes I made in when I began investing in Chinese companies back in 2007. While the shale certainly presents a different set of opportunities than did China back then, I think the lesson is still a valid one: Be patient. And wait for the right time to jump in. It might come sooner than you think. 

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Casey Hoerth has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

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