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Tickers in this Article: XTO, SM, KWK, SD, CHK
Less than one month ago, I wrote about five companies in the oil sector that were on fire as the price of oil broke above $145 per barrel, in Bulls In The Oil Patch For July 8. It is now barely two weeks later, and oil has dropped below $125 per barrel - a 15% decline. The oil and gas sector has been a volatile one this year, as the price of oil ranged from a 52-week low of $68 to a high of $147. So, it can be assumed that companies in the sector will be just as volatile.

In this edition of Bulls/Bears In The Oil Patch, we see five companies in the energy sector whose results have gone the opposite direction from when last we met them. Here are five companies that have seen double digit losses over the past month of trading. Let's take a closer look and determine whether this pullback is signaling then end of the oil bull market or just a good entry point. (Even with oil prices falling, gas is still not cheap at the pump. Learn some tips to put a little cash back in your wallet by reading Getting A Grip On The Cost Of Gas.)

Company One Month Loss* Market Capitalization
XTO Energy
(NYSE:XTO)
34.3% $24 billion
St. Mary Land & Exploration
(NYSE:SM)
32.4%
$3 billion
Quicksilver Resources
(NYSE:KWK)
31.6%
$4 billion
SandRidge Energy
(NYSE:SD)
30.8%
$7 billion
Chesapeake Energy
(NYSE:CHK)
30.7%
$25 billion
*Data as of market close July 23, 2008

XTO Energy Slips
Less than a week after XTO Energy (NYSE:XTO) reported a 33% increase in profits, the stock fell 17% in two days as oil settled below $125 per barrel. Although the 33% increase in profits had beaten the Street's estimates, XTO has a lot of debt and announced that it would be issuing more shares to raise money to help pay for it. The large declines in the price of oil and the new share issue (which was priced at $48) have helped push XTO down over the past month, now just $8 off of its 52 week low.

Oil Fires Going Out?
There are a lot of different factors that have been contributing to the run up in the price of oil. Many say that it is the speculators, and certain members of Congress and the Senate have been pushing legislation that will put position limits on traders that do not have a hedging interest in the market. Other parties are saying that it is supply worries, as global demand for oil has been increasing and threats on supply have been widespread. Geo-political risks, such as the risk of Iran becoming sanctioned, could put a large dent in worldwide supply. Iran is currently the fourth-largest exporter of oil worldwide. Other supply risks, such as the current risk of Hurricane Dolly, are completely out of our control.

Most of these risks are still in play - even though Dolly is not expected to have as large of an impact on oil operations as originally was thought, the Hurricane did smash into Texas today, and could still do some damage. Legislation is still not in place to prevent the speculation in oil markets, and I, among many others, highly doubt that in a free market such as ours that this legislation will ever take hold; and finally there is the issue with demand. As we take greater strides towards weaning ourselves from oil, global demand will decrease but to the point where oil is not needed is not anywhere in the near future. (To learn about the supply and demand issues, check out Peak Oil: Problems And Possibilities.)

As we use less, and find ways to produce more (through new proposed domestic drilling), the supply issue may come into line, which is really the only way to bring oil down in the long run - with emphasis on using less. Oil seems to have come up above and beyond all expectations over the past year or so, and it seems to be slowing down now. I do believe that oil should be expensive in relation to where prices were just five years ago, but the significant run-up that we have seen was too much. I am looking at these current events as a chance for the markets to slow down and get a handle on what these companies are really worth.

It doesn't matter if oil is worth $100 per barrel or $175 per barrel, companies in this sector are still going to make money hand over fist. Large declines like we have seen over the past couple of weeks are in most cases profit taking in the face of fear. I look at corrections such as these as good opportunities to buy companies a bit cheaper than they were previously, in and industry that only has one place to go - and that is up.

Add Your Two Cents
What do you think will happen with the price of oil going forward? Will a continued decline, spell disaster for companies in this sector? Be sure to join me (aytonmm) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.

For further reading, be sure to check out our Oil And Gas Industry Primer.

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