2 High-Yielding Energy Majors That Are Attractive Here

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 |  Includes: BP, COP
by: Bret Jensen

Executive Summary:

  • WTI oil prices are over $100 a barrel for the first time since late December. Natural gas prices have also risen lately.
  • Despite this, energy names have underperformed the market over the last few months.
  • High-yield stocks & sectors have outperformed the market so far in 2014.
  • Below are two high-yielding energy names that are selling at an attractive entry point

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The New Year sure has been different so far than 2013 was for the markets. The previous year delivered to investors a 30% rally with low volatility and barely any declines to 'buy the dip' even in the face of rising interest rates in the back half of the year.

2014 has started with much higher volatility. 25 of the 27 trading sessions so far this year have had at least a 100 point intraday swing in the Dow. Pundits' predictions have mainly missed the mark in the first six weeks of the year as well. Contrary to the consensus, interest rates are falling and gold prices have also risen.

In addition, high-yield sectors & stocks that substantially underperformed the market during 2013 have been some of the strongest areas of the market in the New Year.

I have been surprised that energy has not been a stronger performer in 2014. WTI oil prices have risen to over $100 a barrel for the first time since late December. In addition, natural gas prices have spiked recently as much of the country is experiencing its coldest winter in over two decades - Global Warming advocates also are off to a poor start in 2014. Despite this, the energy sector has underperformed the market over the past three months (See Chart).

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I believe the outperformance of high-yield instruments will continue until the market gets some clarity around the direction of the domestic and global economies. I also think the energy sector will make up for its recent underperformance. Combining these two theses provides two attractive high-yield plays in the energy space.

BP Plc (NYSE:BP) continues to be a large holding in my income portfolio. The company continues to work through the massive litigation triggered by Macondo disaster in the Gulf of Mexico in 2010. The firm is in the 7th or 8th inning of finishing up the remaining outstanding lawsuits and regulatory actions connected to the tragedy. Once complete, this should help lift the remaining negative sentiment on the equity.

The shares yield a robust 4.8% and dividend growth should accelerate once the Macondo incident is in the rear view mirror. The shares are attractive at under 10x this year's expected earnings, less than 40% of annual revenues and around 15% above book value. I have had the shares since they dipped under $30 a share right after the explosion and spill in 2010. I am looking forward to the time when the company can focus on production growth instead of litigation which should be in the near future.

ConocoPhillips (NYSE:COP) is offering an attractive entry point after declining a little more than 10% over the past few months. I have recently added to my core income position. The shares also continue to be my top pick among the domestic oil majors. Conoco has a significantly higher yield (4.2%) than either Chevron (NYSE:CVX) or Exxon Mobil (NYSE:XOM). In addition, thanks to the spinoff of Phillips 66 (NYSE:PSX) in 2012; the company does not have the refinery operations that have had negative impacts on its bigger brethren's earnings reports this quarter.

This domestic oil major also continues to divest non-core assets overseas and is investing the proceeds into growing domestic production. It is seeing production growth in the high teens from its properties in the Eagle Ford, Bakken & Permian shale regions. The shares are attractive given the stock's high yield at ~10.5x this year's expected earnings. The 16 analysts that cover the shares have a $77 a share median price target on COP which seems a more appropriate level for the stock over the medium term.

Disclosure: I am long BP, COP. 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.