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By Faiza Naz

The current global economic situation and debt concerns have induced investors to invest in stocks with strong historical background and future prospects. On the back of increasing commodity prices and ongoing energy demand the oil and gas exploration sectors has always attracted fresh investments. We have uncovered five must-own energy stocks that have potential to outperform the market in future:

Suncor Energy Inc. (SU):

Our first pick is SU, Canadian Energy Company, which has a strong management team that has been able to prove itself through its strong historical growth.

The company is very optimistic and determined as it plans to increase its oil production to the one million barrels mark by 2020. In 2011, the company targets to achieve the oil production level of 550,000 to 600,000 barrels. The company’s initiatives include supply chain optimization along with improved inventory management and workforce rationalization.

In July, the company announced its second quarter results. The company reported quarterly revenue growth of 13.3% year on year. Gross and operating margins stood at 47.26% and 13.74% respectively. SU was better off than its close competitor Imperial Oil Ltd. (IMO) in the said period in terms of gross margins but underperformed in terms of operating margins.

A few risks that may concern the investor include the Libyan operations that have hampered company’s production in the area. Moreover, due to weak market conditions, SU is facing difficulty in evaluating non-core sales opportunities in North America. Also, the Integrated Swivel Turnaround (IST) that was originally planned for TN in 2011 has been delayed until 2012. Despite of these hurdles the company expects to meet its revenue and growth targets.

On August 9, analyst at Banc of America Securities/Merrill Lynch upgraded SU to buy from neutral. Goldman Sachs (GS) and Barclay’s (BCS) capital have buy recommendations on the stock with target price of $63 and $50 respectively. We recommend a buy on the stock because at the current price of $29.58 it offers an upside of 57% from estimated target price of $46.58.

Anadarko Petroleum Corporation (APC):

Trading at $69.88 price levels, APC offers an investment opportunity for long term investors. APC’s second quarter results were announced on July 25. The company reported a record liquid sales volume with high margins resulting in massive cash flows. The earning per share was recorded at $1.14 which was above market expectations. Quarterly revenue growth was 45.7% year over year which was higher than industry average growth of 15.5%. BP plc (BP), a direct competitor, reported revenue growth of 37.5%.

APC outperformed in gross margin and trailing twelve month stood at 80.02% against BP and industry average of 13.89% and 62.54% respectively. As far as operating margins are concerned, the industry average stood at -8.45% which is much lower than APC operating margin of 20.11%. Strong revenue growth and better margins justifies the high P/E of 41.50 times.

Given the company’s strong historical performance and future growth prospects we recommend a buy on the stock. Moreover, after the quarterly result announcement by APC, Goldman Sachs upgraded APC from neutral rating to buy with a target price of $100- a potential upside of 43% from current price level. In contrast, Barclays Capital cut their target price from $88 to $80.

Southwestern Energy Co. (SWN):

With earnings per share of $1.76 SWN currently trades at a P/E of 20.40 times at $35.91 levels. . The company’s strength is evident from its historical financial performance. SWN recorded in its most recent quarter a profit margin of 21.99% which is much higher than its close competitor, Chesapeake Energy Corporation (CHK) which reported a profit margin of 11.89%. SWN posted year over year quarterly revenue growth of 29.7% surpassing the industry average growth rate of 15.5% in the said period. The main reason behind the strong revenue growth was increasing production in Fayetteville Shale operations.

SWN is focusing on increasing its production from Fayetteville Shale, Appalachi, East Texas and other places in the near future. Moreover, the company continues to acquire underdeveloped areas for future exploration. Currently the company is in the process of acquiring 410 miles in New Brunswick.

On September 8, UBS upgraded SWN to a buy from a neutral rating on the back of its raise in production guidance of 483-491 Bcfe and drilling results from Lower Smackover Brown Dense. However, UBS lowered its target price from $52 to $44 offering an upside of 23% from current price level.

On the back of high drilling activity by SWN, we believe that the company will continue to report growth in revenue and profits going forward. Therefore, we recommend this stock as a must buy. Moreover, 86.8% of SWN stock is held by institutions and it has a beta of 0.41 which means it is 59% less volatile than the market. Currently SWN has a potential upside of 37% from its estimated one year target price of $49.03.

Denbury Resources, Inc. (DNR):

DNR has one of the most aggressive and experienced teams. The company continues to increase production through development and acquisitions of wells in the U.S. Gulf Coast region. Its focus is on Enhanced Oil Recovery (EOR).

Currently trading at the price level of $13.96, DNR enjoys a P/E of 19.65 which is higher than its peer Newfield Exploration Co. (NFX) P/E of 16.13 times but lower than industry average P/E of 21.54 times. The company posted quarterly revenue growth of 21.10% for its latest quarter. DNR has an impressive operating margin of 34.15% when industry average operating margins for trailing twelve month is in negative zone.

DNR is undervalued in terms of price to earning growth ratio (5 year expected) of 0.50 which is much lower than NFX (0.90) and industry average (0.99).

UBS has a neutral stance on the company with target price of $30-a potential upside of 114%. We recommend investor to buy this stock. Its one year estimated target price of $26.83.

Quicksilver Resources Inc. (KWK):

With earnings per share of $2.16 KWK currently trades at $8.52. The stock is currently trading at discounted P/E of 3.94 times which is much lower than its direct competitor Chesapeake Energy Corporation (CHK) P/E of 20.24 times and industry average P/E of 21.54 times. As per the latest results, KWK reported revenue of 6.9% which is lower than industry average. However, gross and operating margins for trailing twelve month stands at 66.09% and 32.78% which is much higher than CHK and industry. KWK strength is also evident from profit margin which was recorded at 40.27% against CHK margin of 11.89%.

KWK's goals for 2011 include increase in production by 20% along with maintaining low cost structures. The commercializing of Horn River natural gas is also in the pipeline which will help in boosting company’s revenue.

At Barclay’s conference on September 8, KWK mentioned that its aims to reduce its leverage position. Some investors are concerned about company’s leverage position and expected a future cash flow deficit. Moreover, on September 8, UBS downgraded KWK from buy to neutral with a target price of $11.00. Bank of America currently has a buy rating on KWK with a target price of $16. With a one year estimated target price of $14.76 the stock offers has an upside of 73% from current level. We recommend that investors buy this stock.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 5 Energy Stocks That Can Outperform The Market