4 Energy Stocks To Watch

By Investopedia Staff | October 20, 2011 AAA

The recent plunge in the stock market has put some energy stocks into free-fall as investors start to discount a fearful liquidity scenario for many of these companies. The combination of falling commodity prices, the resulting threat to the funding of capital plans and possible equity issuance has proven to be too much to handle.
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Williston Basin Player
Kodiak Oil and Gas
(NYSE:KOG) reached a high of $7.70 per share in March 2011 as investors eagerly sought out operators leveraged to crude oil in general, and the Bakken formation in particular.

The stock continued to trend down with the general market through the summer and early fall, losing about 15% of its value until the bottom dropped out in late September, after the company announced the purchase of additional leasehold acreage in the Bakken play for $235 million.

While adding acreage in an oil play is normally a time of celebration for many investors, the market was not pleased by the purchase, and seems to have incorporated a worst-case scenario for Kodiak Oil and Gas with falling oil prices cutting cash flows and forcing it to raise equity. (For related reading, see Peak Oil: What To Do When The Wells Run Dry.)

Kodiak Oil and Gas even took extra precautions to make this purchase palpable to the market. The properties acquired were partially developed with production at 3,000 barrels of oil equivalent (BOE) per day, providing cash flow for the company to help develop its acreage.

Kodiak Oil and Gas secured a $115 million increase on the company's credit facility to help pay for the new properties. The company plans to borrow funds and use cash on hand to pay for the acreage.

Other small cap exploration and production companies find themselves afflicted with this market pessimism. Magnum Hunter Resources (NYSE:MHR), which is active in the Marcellus Shale in Pennsylvania and West Virginia, reached $7.90 per share over the summer and has dropped over the last two weeks by more than 60%.

GMX Resources (Nasdaq:GMXR) has taken a similar plunge, from a high of $5.63 per share down to under $2 per share. The company was primarily focused on the Haynesville Shale and Cotton Valley formation, but has acquired acreage in the Bakken and Niobrara plays to focus on oil and liquids.

Chicken Little?
While dilution of ownership is a legitimate concern for an investor, it is not necessarily a death knell for a company. In May 2009, Brigham Exploration Company (Nasdaq:BEXP) issued 32 million shares of common stock, with the proceeds used to pay down debt and restart the company's operated program in the Bakken formation.

This offering increased shares outstanding by 65% and led to a 23% decline for the stock the following day. Brigham Exploration Company priced its offering at $2.75 per share, and a year later the stock was above $20 per share.

The Bottom Line
Investors with nerves of steel that have a higher appetite for risk should take a look at the many energy stocks that have been thrown out by the market over the last two weeks. If fears of a recession turn out to be unfounded, the return on these stocks may be too good to pass up. (For related reading, see Oil: A Big Investment With Big Tax Breaks.)

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