Three Energy Stocks Currently Undervalued With Greater Than 10% Upside Left

Includes: HAL, NOV, PSX
by: Harlan Kessler

Interest rates have now started to rise and, with stock prices at historically high levels, investors are naturally concerned about fresh equity investments and which stocks they should consider. Fortunately, over the last few days, we have had a number of recommendations from leading analysts, most over or undervalued lists from sell side firms and institutional investors filings giving us a number good starting points for further due diligence. In this article, I am going to look at 3 stocks worth buying in the energy sector.

Phillips 66

Phillips 66 (NYSE:PSX), which is part of the Berkshire portfolio, announced earnings for the second quarter which were slightly lower than anticipated. Revenues decreased by 8% from the previous year, to $43.9 billion, however this was actually higher than estimates. Earnings per share fell 33% to $1.50 per share, well short of the consensus expectations. Free cash flow from operations was relatively strong at $597 million for the quarter and stands at $2.4 billion for the year thus far. The company said that the biggest disappointment in the quarter was the second power outage at Sweeny, which has a negative impact on all its businesses. As a result, the refinery and all the ethylene units were down with the frac being down as well. It has reiterated its determination to find a long-term solution for the problem. Results in the other businesses were not so volatile, though midstream earnings at $90 million were down 5% over the previous year due to a decline in earnings from natural gas liquids. The company says that it will have future capacity utilization in its refineries of approximately 95%.

Though the quarterly results were not particularly impressive, things should look up in the future the specially with the decision to enhance value addition in the midstream segment. The stock has a dividend yield of around 2.2% and the 52 week high and low prices are $70.52 and $40.42 respectively. It currently trades at $59.01 compared to the analysts' mean target price of $70.85 and median target price of $71.00 meaning there is a possible upside of better than 25%.

Halliburton Co.

Halliburton Co. (NYSE:HAL) stock has already risen by almost 30% this year and firm oil prices should enable the stock to continue the trend. It is estimated that 90% of all onshore wells in the U.S. will require some kind of hydraulic fracturing or fracking services and this is good news for the company's oil field services. This market is changing due to the advancement of technology in extracting oil and gas from shale rock and only companies that have a large portfolio of products which can be utilized to effectively help energy companies maximize their extraction from shale unlikely to prosper in the future. This gives companies like Halliburton which have access to lots of capital a distinct edge over its smaller competitors.

This is welcome news for the company which is already experiencing pressures on sales of its pressure pumping business as well as wireline and coiled tubing because of oversupply and shrinking demand. However, the company could benefit from the trend in the industry focusing on pad drilling. This is a new technique named at increasing the efficiency of exploitation of shale deposits which is now used by around 50% of the companies in the rig business. It is not yet clear how much Halliburton would benefit because energy companies have the choice of redesigning their current equipment or buying new products from the likes of Halliburton.

Although this is an uncertain time for oilfield services companies, there are plenty of reasons to be bullish on Halliburton. Earnings per share are expected to grow by 7% this year and 28% next year. The company should be in an ideal position to capitalize on the increasing demand for pad drilling. As a result of a tender offer and response, Halliburton has said it expects to repurchase 68 million shares of common stock at $48.50 per share, for a total of $3.3 billion. The consensus target price for the company is $ 54.00 per share and Goldman Sachs believes that the price could go all the way to $60.00. Because the stock currently trades at approximately $49.00, the up side could be as much as 25% on the Goldman estimate.

National Oilwell Varco Inc

National Oilwell Varco Inc. (NYSE:NOV) is still a relatively new investment for Berkshire Hathaway and the big take away from its second quarter results were its margins. The Rig Technology group's results were disappointing because of the congestion caused by the acceleration in delivery schedules. The company had incurred more expenses because of high volumes and tight deliveries though the company is making efforts to speed up project completion. The business was also affected by weak demand for land rigs in North America. Despite these problems, the company still continues to satisfactory margins across the board.

Revenues in the Rig Technology, Petroleum Services and Supplies, Distribution and Transmission businesses all showed growth compared to the first quarter and are at highs for five years. 2013 is not going to be a good year for earnings which are expected to decline by 8% but subsequently earnings are expected to grow by 17% in 2014 and 10.6% over the next five years. One of the good things from the Q2 earnings conference call was the record order backlog with an intake of new orders worth $3.15 billion which takes the total backlog up to $13.95 billion.

The share is trading at $76.00 against a consensus price target of $83.15 which means that there is already an upside of around 14% in addition to the dividend yield of 1.4%. I would regard the stock as cheap because the P/E ratio of 13.42 is much lower than the industry average P/E ratio of 18.9 and the P/B ratio at 1.49 is only half that of the industry average.

Also of note, Berkshire increased its position by 40% in the first quarter and several other value portfolios have also added the stock. I personally believe that the margin problem is short term and that the company has good potential long-term.

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.