The Middle East is a powder keg about to explode. The energy supply of the globe is threatened once again. According to a recent Reuters report, "Brent oil prices rose more than 1% reaching $110 a barrel on Wednesday, snapping a two-day slide as Israel launched a major offensive against Palestinian militants in Gaza, reinforcing concerns about tensions across the Middle East." You can take your pick of the recent strife in the region. Israel, Iran, Syria, Afghanistan, Iraq and Libya are smoldering tinderboxes on the cusp of igniting.
Demand for energy is outstripping supply even as global growth allegedly stalls and energy gurus invent new ways to extract the black gold. Most of the easy oil and gas resources have been discovered and depleted. Much more expensive endeavors such as hydraulic fracking and deep sea drilling are the primary sources of new discoveries. Even with all the new discoveries, a majority of the supply for the world's energy requirements still currently emanate from the Middle East. Any disruption in the supply from the Middle East bodes well for the U. S. energy companies covered in this article as oil and gas reserves will rise in value substantially.
Furthermore, several macroeconomic and geopolitical events are developing that may spur these stocks even higher. The news China is investing billions in infrastructure to stimulate their economy coupled with the positive steps taken by the ECB and the Fed regarding QE should spark a rally in dollar denominated commodities such as oil and gas at some point. Moreover, with the dollar sliding, which is bullish for dollar-denominated assets as well. All this bodes well for these North American energy plays.
Finally, these stocks are all bona fide North American energy plays that all have catalysts for future growth regardless of the Middle East or QE. The question: is now the optimal time to buy?
In the following section, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to start a position. The following table depicts summary statistics and Wednesday's performance for the stocks. The following charts are provided by Finviz.com.
Clean Energy Fuels Corp. (CLNE)
The company is trading 49% below its 52-week high and has 26% upside potential based on the consensus mean target price of $15.89 for the company. Clean Energy was trading Wednesday for $33.80, down almost 1% for the day.
Fundamentally, Clean Energy has some positives. Clean Energy's expected EPS growth rate for next five years is 27%. Sales are up 27% quarter over quarter. The company currently trades for two times book value. Insider ownership has risen 45.51% over the past six months.
Technically, Clean Energy appears haggard. The stock has been trading in a tight trading range near the lows of the year for several months. Nonetheless, the stock has recently pushed higher and is testing resistance at the 50-day sma.
Clean Energy reported earnings on November 5th. EPS was in-line with the street's estimates and the company beat on revenues. Revenue for the third quarter ended September 30, 2012 was $91.5 million, up from $72.1 million in the third quarter of 2011. For the nine months ended September 30, 2012, revenue totaled $234.9 million, up from $206.5 million a year ago. The stock is up due to a recent announcement by General Electric Co (GE) that it has reached a deal to sell equipment to Clean Energy. The company is building out a series of liquefied natural gas fueling stations for U.S. truckers. I like the stock here. I would layer in to the position.
Halliburton Company (HAL)
The company is trading 25% below its 52-week high and has 43% upside potential based on the consensus mean target price of $42.68 for the company. Halliburton was trading Wednesday for $29.95, down over 1% for the day.
Fundamentally, Halliburton has some positives. The company has a forward P/E of 9.87. Halliburton pays a dividend with a yield of over 1.18%. Halliburton's expected EPS growth rate for next five years is 19.30%. The current net profit margin is 10.26%. Halliburton's PEG ratio is .50.
Technically, Halliburton has been on fire since June. The company pierced the 200-day SMA at the beginning of August and retested it once again at the beginning of September and has pulled back to just above the 200-day SMA now. The RSI was indicating the stock was overbought in my last update, now is the time to start a position.
Halliburton's profit streams are stable. The company is one of the oldest and most trusted oil service companies in the business. With all the recent turmoil in the Middle East beginning to boil over, I expect Halliburton to do quite well going forward. The U.S. is to become the biggest oil producer by 2017 according to the International Energy Agency (IEA). I see this as a major opportunity for Halliburton. The stock is a buy at this level.
Cheniere Energy, Inc. (LNG)
The company is trading 25% below its 52-week high and has 54% upside based on the consensus mean target price of $22.00 for the company. Cheniere was trading Wednesday at $14.26, up 1% for the day.
Fundamentally, Cheniere has a couple of bright spots. Earnings per share are up 36% quarter over quarter and insider ownership is up 71% over the past six months. Additionally, many fundamentals are improving incrementally. On the other hand, Cheniere has a net profit margin of -112% which makes this a speculative play.
Technically, the stock looks poor. The stock has been in a free-fall since the beginning of November. The stock has broken through all major support levels and appears to be testing the August lows at the $14 level.
The stock is up 200% from the time I originally recommended it in December 2010 when it was trading for $5.39. The price of natural gas in Asia is much higher than in the U.S. This is an opportunity for major profits. The problem is the natural gas market is for the most part local. It is not as easy to ship natural gas as it is to ship oil. Natural gas must be super-cooled so it liquefies. Cheniere received permission from the US Department of Energy to export LNG produced in North America from its Sabine Pass terminal. The company had already received permission to re-export imported LNG. This is the crux of the argument for buying Cheniere. I would wait for confirmation the stock has bottomed prior to starting a position. Nonetheless, I posit the stock is an excellent long-term buy.
Tesoro Corporation (TSO)
The company is trading 16% below its 52 week high and has 39% potential upside based on the analysts' mean target price of $52.29 for the company. Tesoro closed Wednesday at $37.62, slightly up for the day.
Fundamentally, Tesoro has many positives. The company trades for 10.37 times free cash flow. Tesoro has a forward P/E of 6.86. The company pays a dividend with a yield of 1.60%. The company trades for 1.2 times book value and earnings per share are expected to rise by 21% for the next five years.
The stock seems to be consolidating after having had a precipitous drop starting in the beginning of October. The stock seems to have found a bottom and is currently hugging the bottom of the uptrend channel.
Tesoro's west coast empire was cemented by a deal to buy out BP Inc. (BP). Tesoro has contracted to buy BP's Carson plant for $2.5 billion, forming the largest U.S. oil-refining empire in the Pacific Basin. Combine this development with the potential asset monetization in the second half of 2012 to early 2013, and you have a recipe for further gains. I would give it another week to see if it holds up at this level prior to starting a position though.
Valero Energy Corporation (VLO)
Valero is trading 16% below its 52 week high and has 35% potential upside based on the analysts' mean target price of $39.07 for the company. Valero closed Wednesday at $28.86, down over 1% for the day.
Fundamentally, Valero has some positives. The company trades for 10 times free cash flow. Valero has a forward P/E of 6.17. The company pays a dividend with a yield of 2.43%. The company trades for slightly less than book value and EPS is up 127% this year.
Technically, the stock looks solid. The stock has been in an orderly uptrend since June. The coveted golden cross was achieved at the beginning of August where the 50 day SMA crosses above the 200 day SMA. This is one of my key buy indicators. The stock has recently come in and is currently trading at the bottom of the uptrend channel. Historically, this has been an ideal time to start a position.
Valero has several positive catalysts for future growth and has performed very well since the start of the year. The company should see significant upside as the infrastructure build out for the U.S. unconventional oil plays continues to mature. If the U.S. is to be the leading oil and gas producer by 2017, Valero will play a major role in the process. The stock is a buy here.
The Bottom Line
I posit these energy equities will continue upward from their current share prices based on macroeconomic, sector and company specific catalysts. These stocks have great stories, good fundamentals and positive facilitators for future growth. However, many are trading at significant discounts due to incessant negative macroeconomic headlines and a lack of confidence from investors that the economic picture will improve anytime soon. I suggest layering into these names as there may be a significant buying opportunity produced by the bureaucrats as they work their way through the so called fiscal cliff.
With China, Europe and the U.S. showing the propensity to ease monetary policy and the Middle East looking more and more treacherous, these stocks should do quite well in the coming years. Still, take your time building a position. One of the major factors affecting your potential return in a stock is your cost basis. I see the recent pullback in these stocks as a buying opportunity.
Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.