Top 10 Energy Stocks You Should Own - Part II

Includes: APA, APC, CVX, E, TOT
by: James Hartje

Last week we released Part 1 of our two-part article series on which 10 energy stocks we liked best. Below are our next five picks.

1. Anadarko Petroleum (NYSE:APC)

Anadarko Petroleum is a large, United States-based crude oil and natural gas exploration and production company. The firm markets, processes, produces, develops, and explores for crude oil, natural gas, and natural gas liquids. Most of Anadarko's revenues come from onshore United States as well as deep-water operations in Algeria and the Gulf of Mexico. Other deep-water operations include operations along both coasts of Africa, Brazil, China, Indonesia, and New Zealand.

Proved oil and gas reserves were 2,560 million barrels of oil equivalent BOE in 2012 with a reserve mix of 46% liquids and 54% natural gas. Last year, total production increased 10% and we expect this number to increase going forward as Anadarko plans to spend about $5.5 billion on onshore capital expenditures in the United States in 2013 alone. Due to current low natural gas prices, Anadarko plans to reduce activities at Marcellus and Pinedale/Jonah to free up resources for more profitable projects.

Last year, international production accounted for 27% of total revenues and we expect this number to increase as APC plans to spend $1 billion in capital expenditures on its international operations. In 2012, APC made some significant discoveries of oil in Ghana and natural gas in Mozambique. The natural gas discovery in Mozambique is very large with a base estimated at 35-65 trillion cubic feet equivalent. We think APC is a great value stock, especially at its current price. Anadarko is trading at $86.10 per share with a total market cap of more than $43.1 billion. Anadarko has an inexpensive forward earnings multiple of 16.5 times 2013 earnings as well as a PEG ratio of 1.04. APC has strong analyst coverage as well, with 90% of the 30 analysts covering the stock maintaining a Buy rating or higher.

APC has the right mix of onshore U.S. developments and foreign exploration projects to continue to thrive and produce great revenue numbers going forward. New discoveries such as the recent APC findings in the Gulf of Mexico and in Mozambique should be very profitable in the long run. Another strength of APC is despite natural gas prices being really low, they have continued to remain profitable despite the fact they are a major natural gas producer. This is why APC will be such a big winner if natural gas prices increase.

APC is a great oil play to own and the added benefit of having exposure to natural gas markets is a huge bonus. We believe natural gas prices have bottomed and will inevitably rise. The consensus on Wall Street among analysts is the same. When that does happen, natural gas producers like APC will reap large profits. For all these reasons, we believe APC is a great buy opportunity. The current average 12-month price target for APC is $110, and we believe that in 12 months APC will be trading at $115 -- a 33% total yield.

2. Apache (NYSE:APA)

Apache is an oil and gas company operating in several countries including the U.S., Canada, the U.K., North Sea, Argentina, Australia, and Egypt. At the end of 2012, it had around 2.85 billion BOE in proved reserves, concentrated in the U.S. and Canada. The proved reserves and the Permian/Central Resources total around 11.7 billion BOE, four times higher than the current proved reserves. The U.S. Permian Basin accounted for around 28% of the company's total reserves. The company is considered the most active driller in the Permian Basin with around 38 operating rigs.

What makes me interested in Apache is its conservative capital structure. As of March 2013, it had nearly $32 billion in equity, $248 million in cash, and only $11.5 billion in long-term debt. Moreover, Apache is a consistent dividend payer. Its dividend increased from $0.21 per share in 2003 to $0.66 per share in 2012. For full-year 2013, Apache expects to push its costs down, increase its dividend, and restructure its asset portfolio.

The company expects to divest $4 billion in assets, and then it would use $2 billion to reduce its debt level and the remaining amount to repurchase 30 million shares. APA currently has great revenue numbers and management has shown its effectiveness as they have produced great ROE and ROA numbers. Apache is trading at $84.90 per share with a total market of nearly $33.3 billion. The market values Apache at only 9.5 times its forward earnings.

While the markets and competing oil stocks have had a great year so far with the S&P up 15%, APA on the other hand has been sluggish appreciating only 8%. Despite this, APA is held by many famous investors, most importantly oil guru T. Boone Pickens, as APA accounts for 9.5% of Pickens' portfolio, his second largest position. Compared to peers Anadarko Petroleum and Exxon Mobil (NYSE:XOM), Apache is valued the cheapest. As a result, investors should invest in APA due to its lowest earnings valuation, strong balance sheet, and the potential asset sales.

If it could divest $4 billion in assets this year, Apache could drive its EPS higher, thanks to the potential share repurchases and debt reduction. Analysts across Wall Street agree that APA is undervalued with an average 12-month price target of $110. We believe Apache will be trading at $117 in 12 months, a yield of 36%. Add on a 0.90% dividend and you have a total yield of 36.90%.

3. Eni SpA (NYSE:E)

Eni SpA, an integrated energy company, engages in the exploration, production, transportation, transformation, and marketing of oil and natural gas. Eni SpA has a market cap of $84.9 billion and is part of the energy industry. Year to date, E is down 8%, opening up a buy opportunity for many investors. We consider Eni SpA to be a great buy opportunity. The company's strengths can be seen in multiple areas such as its revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and attractive valuation levels.

We feel these strengths outweigh the fact that the company shows weak operating cash flow. Revenue growth has been a strength for E as they greatly exceeded the industry average of 6.9%. On top of that, revenues rose by 42.8% over the past year. Growth in the company's revenue appears to have helped boost the earnings per share. We expect this kind of earnings growth to continue propelling ENI SPA and sending the stock price higher. The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the oil, gas and consumable fuels industry. The net income increased by 65.5% when compared to the same quarter one year prior, rising from $1,972.25 million to $3,264.41 million.

The company has come a long way in a year. Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. While ENI SPA doesn't receive much analyst coverage with only three analysts covering the stock (one Strong Buy, one Buy, and one Hold), that doesn't mean it's not a great investment opportunity. The fact that it is relatively unknown adds to its potential because if they continue to increase earnings year after year they will soon get recognized and soar significantly higher as a result.

Eni SpA is also a great dividend play, with a dividend yield of 5.20%. Overall, we believe Eni SpA is a great long-term buy opportunity and have a 12-month price target of $65 per share, a yield of 21%. Add to that a dividend of 5.20% and you have a total yield of 26.20%.

4. Chevron (NYSE:CVX)

Chevron is the second largest U.S. integrated energy company. For investors who like strong growth dividend stocks, then Chevron is the right pick for you. CVX has been an avid dividend grower for decades, with an average annualized dividend growth of 9.1% over the past five years. Its dividend growth rate over that period was lower than its EPS growth rate, which stood at 13.7% on average. Among its main competitors, CVX has had the highest rate of dividend growth since 2004. Even though the company is expected to post a paltry EPS CAGR of less than 1% for the next five years on average, its solid cash flow generation will likely support continued dividend increases. Chevron explicitly states that one of its consistent financial priorities is to maintain and grow the dividend.

CVX has a strong balance sheet, with $17.3 billion in cash and only $12.1 billion in long-term debt. Its long-term debt is only 8.6% of its stockholders' equity. CVX has the highest profitability per barrel among its peers and the highest cumulative cash flow per share expansion over the past five years. Thus, its case is supported by leading earnings and cash margins, strongest future volume growth among its main peers, and solid shareholder value enhancement potential.

It should be noted that the company is known for its generous share buyback programs -- it returned $5 billion in share repurchases last year alone. Chevron is currently covered by 25 analysts, of which 67% have a buy rating or higher. We are among the group that believes CVX is a great buy opportunity, and we have a 12-month price target of $145 for a yield of 20%. Add to that Chevron's 3.20% dividend and CVX is set to offer a 23.20% annual return.

5. Total SA (NYSE:TOT)

Total SA is a French integrated oil company operating worldwide and employing more than 95,000 people worldwide. The company deals with all aspects of the oil and gas chain, from exploration to production, refining, transportation, and marketing. Total keeps announcing new oil discoveries, a growing production and improving results and dividends. Moreover, the French company's strategy is to now focus on exploration and invest in riskier/growing sectors, such as shale gas in the U.S. or bituminous sand in Canada. Total has been ramping up its efforts to rejoin the big boys of the oil and gas sector. The company has achieved a strong production base in Africa, and for the next three years it is striving to capitalize on the Middle East as well by building a $1.5 billion condensate refinery in Qatar.

Total SA is currently undertaking several other projects to position itself as one of the most competitive in the industry along with the goal of increasing its profits and market share. These, in turn, will more likely improve the market share of the company and its stock price. The P/E ratio of the company stands at 10.17, which shows that the stock price is equally valued. On the other hand, P/B indicates that the stock price is discounted relative to the industry average of 2.49, making it attractive to investors. Price to earnings per share growth indicates the Total is currently trading at a premium as compared to the industry average. However, it is trading at a discount compared to major players in the industry.

Another major reason to buy Total is that they are the leader in the oil and gas sector and invest massively in exploration. The company just received several licenses in the new potential Arctic fields. Total is also investing in the solar and biomass energies, which should drive the revenues long term. Total's objective is to invest $22 billion annually between 2012 and 2014 while selling off $20 billion in assets by 2014. TOT also offers a great dividend yield of more than 4.5% right now, which has kept growing over the years. Total has developed a good payout ratio of 45% in 2011 as well as a strong link with its investors.

Overall, we believe TOT is a great buy opportunity based on their attractive valuation level as seen in the P/E ratio, which is well discounted in comparison to the industry average. On top of that, the company shows outstanding financial performance as seen in its high earnings yield and high revenue growth. The future outlook of the company looks promising as it continuously embarks on several modernization and innovative projects, such as the Antwerp refining and Port Arthur shale gas, which can boost its profit and position it as one of the most competitive companies in the industry. Our 12-month price target for TOT is $72 per share, a yield of 40%. Add on a 4.5% dividend and you have a total net yield of 44.5%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.