Several events have occurred recently that could spur energy stocks higher. According to a recent Reuters report,
"Brent crude for March delivery gained 34 cents to $112.05 a barrel, while February U.S. crude was up 61 cents at $96.17 a barrel, having recovered from a session low at $94.94."
The lift was primarily credited to the Bank of Japan announcing it would switch to an open-ended commitment to buying assets next year and double its inflation target to 2% in an effort to end years of economic stagnation.
Furthermore, positive economic news out of China coupled with the positive steps taken by the ECB and the Fed may spark a rally in dollar denominated commodities such as oil and gas over time. All this bodes well for these energy plays.
Finally, these investments are all bona fide US energy companies that are trading for close to book value which have 20% upside on average based on consensus mean price targets. They all have catalysts for future growth regardless of the Middle East or QE. The question is: 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 Tuesday's performance for the stocks. The following charts are provided by Finviz.com.
Apache Corp. (APA)
The company is trading 26% below its 52 week high and has 27% upside potential based on the analysts' consensus mean target price of $104.50 for the company. Apache was trading Tuesday for $85.25, up almost 1% for the day.
Fundamentally, Apache has several positives. Apache trades for 1.04 times book value. The company has a forward PE of 8.44. Apache pays a dividend with a yield of .83%. Apache's current net profit margin is 14.85%.
Technically, the stock looks solid. The stock has been in an uptrend over the last couple of months. Recently, the stock broke out above long-term resistance.
Apache reports on Feb. 3rd. I am considering starting a position prior to earnings. I posit they will beat lowered expectations. Apache is well positioned to take advantage of the booming US natural gas market with one of the few West Coast LNG export terminals in operation.
Baker Hughes Incorporated (BHI)
Baker Hughes is trading 14% below its 52 week high and has 7% upside potential based on the consensus mean target price of $48 for the company. BHI was trading Tuesday for $44.99, up almost 2% for the day.
Fundamentally, BHI has many positives. The company has a PEG ratio of 1.39 and is trading for 1.15 times book value. The company has a forward P/E of 14.20. EPS for the next five years is expected to rise by 10%. The company pays a dividend with a 1.35% yield as well.
BHI's stock just broke out to the upside from a descending triangle pattern. This is very bullish. All the major moving averages have changed direction and are now trending upward.
BHI just broke through resistance at the 200 day sma. The stock is a buy going into earnings. If they miss for some reason and the stock goes down, I would buy on the weakness. BHI reports on Wednesday the 23rd.
Chesapeake Energy Corporation (CHK)
The company is trading 27% below its 52-week high and has 22% potential upside based on the analysts' mean target price of $23.02 for the company. Chesapeake was trading Tuesday for $18.73, up over 5% for the day.
Fundamentally, Chesapeake has several positives. Chesapeake is trading for 77% of book value. Chesapeake's projected EPS growth for next year is 158%. The company has a forward P/E of 14.37. Chesapeake is trading for 77% of book value. The company pays a dividend with a yield of 1.96%.
Technically, Chesapeake has broken through two major resistance levels recently. The stock was pinned at the $17 mark for most of the last quarter yet recently spiked in 2013 blowing through the 50-day and 200-day moving averages.
Chesapeake is down significantly due to past alleged shenanigans by the CEO. I see this as an excellent entry point, although I would wait for a bit of a pullback as the stock has popped 5% on Tuesday alone on news of a cold snap driving natural gas prices up.
Devon Energy Corporation (DVN)
The company is trading 28% below its 52 week high and has 29% upside potential based on the consensus mean target price of $70.94 for the company. Devon was trading Tuesday for $58.13, up over 3% for the day.
Fundamentally, Devon has several positives. The company has a forward PE of 13.11. Devon pays a dividend with a yield of 1.47%. Devon's expected EPS growth rate for next year is 28.17%. The company's profit margins are improving. The current net profit margin is 7.29%.
The stock took a major hit after the election results just as most energy stocks did. The stock is just now beginning to show signs of life after trading in a tight range between $50 and $55 for the past quarter.
Devon has 29% upside potential based on its mean target price. If the stock is able to breach resistance at the $55 mark and hold above it, this would be the signal to buy for me. The stock is a buy at this level.
Hess Corporation (HES)
The company is trading 13% below its 52 week high and 14% below the analysts' consensus mean target price of $66.81 for the company. HES was trading Tuesday for $58.87, up over 2% for the day.
Fundamentally, HES has several positives. The stock is trading for slightly less than book value. The stock has a forward PE of 9.14. HES pays a dividend with a yield of .69%. EPS is up 87% quarter over quarter. The company's profit margins are improving. The current net profit margin is 4.14%.
HES has been in a well-defined uptrend since July of 2012. The stock recently fulfilled the coveted golden cross recently which is extremely bullish. The stock has been on a tear as of late and may be showing signs of being overbought currently with a RSI of 76.
HES is a buy, but I would wait for a pullback prior to starting a position. The company reports earnings on January 30th. I would hope for a pullback on earnings to get in.
The Bottom Line
The Middle East is a smoldering tinderbox on the cusp of igniting. There is no good solution regarding the vulnerability of oil and gas facilities across the region, as the recent attack on facilities in Algeria suggests.
Moreover, demand for energy is outstripping supply even as global growth slows and experts develop new methods to extract oil and gas. Even with all the new discoveries, a majority of the supply for the world's energy requirements still emanate from the Middle East. The ever-present risk that Middle East oil supplies will be shut off coupled with the prospects of an economic recovery underpins the value of these energy plays long term.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in on a weekly basis at a minimum to reduce risk. Set a stop loss order to minimize losses even further if you wish.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CHK, DVN, APA, BHI, HES over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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.