In times of continuously growing thirst for energy and no tangible substitute in sight, energy companies have remained the center of attraction for the investment community the world over. Though energy prices witnessed significant turmoil in the aftermath of a pro-crisis 2008, they came back strongly, shedding concerns of an extended period of soft prospects for the companies in this business. With the rise in international energy prices expected to continue as a reason of a genuine demand-supply mismatch, I have identified 5 energy stocks which have all the characteristics to capitalize on this notion and big time. Specifically, each of these stocks provide the best mix of compound annual profit growth of 12% or higher and net margins of at least 10% and well as a discounted share price.
[click to enlarge]
Southwestern Energy Company (SWN) engages in the exploration, development, and production of natural gas and crude oil in the United States. The company operates through two segments, Exploration and Production, and Midstream Services. The stock is the top performer in my list with a net return of 14% since the start of this year with a peak of 29% touched in July 2011. Financially speaking, SWN has reflected considerable growth during the last five years. With a 5-year CAGR of 31% in its topline, not only was the company able to absorb the oil market crash of 2008 (with a minor dip in sales and a slightly red bottomline), its average annual profitability growth excess over revenue growth tells that it has also been able to generate better returns for its shareholders. From an investment perspective, though the company appears as expensive based on its earnings comparison with its closest competitors like Chesapeake Energy Corporation (CHK) and Williams Companies Inc. (WMB), the justification of this premium lies in SWN’s operational superiority over CHK and WMB. During the last four quarters, in contrast to WMB’s $ 525 million loss and CHK’s net margin of 10%, SWN was able to come out with a towering net margin of 22% (2006-2010 net margin – excl. 2009: 22%). Therefore, I expect SWN to continue to trade at premium multiples.
Anadarko Petroleum Corporation (APC) is one of the world’s largest independent oil and gas exploration and production companies. It markets natural gas, crude oil, condensate, and oil and natural gas liquids (NGLs), as well as owns and operates natural-gas gathering, processing, treating, and transportation systems. The stock comes second in our list with a year-to-date return of 8%. The company’s financial performance during the last five years reflects its heavy exposure to the international oil prices. In terms of revenue, though APC registered a net 5-year CAGR of 12% (2005-2010), there are significant variations in between which are almost identical to international oil price movements. More importantly, in times of rising oil prices (2006-2008), the company’s profitability followed its sales pattern almost exactly; however, this relationship has weakened during the last two years which shows certain shortcomings in adjusting its cost structure required to maintain the past margins. However, this transition is expected to be completed in the current year as the company is all set to grow its bottomline by 77%. In addition, the stock has kept its “premium” momentum over its closest competitors, Apache Corporation (APA) and Canadian Natural Resources Limited (CNQ), since July 2011 which is expected to sustain on the back of rising oil prices internationally.
Denbury Resources, Inc. (DNR) is a small-to-medium sized energy company engaged in extraction of oil and natural gas in the Gulf Coast. DNR’s recent financial history has been contrary to being “typical”, with wide swings in its topline during the last five years and more than doubling in 2010 over the previous year. However, the consistent pattern of net margins, which was disturbed due to a turbulent 2009, is still far from return to normalcy as the number for 2010 came out half (14%) against an average of 28% (2005-2008). Despite a consensus 2011 expectation for earnings growth of 78%, the stock is down 13% since the start of the year, which is only making it attractive. The firmness of the case of “mean-reversion” of DNR’s price can be corroborated from the expected net margin for 2011 i.e. 23% which is a clear sign of consolidation of the company around its lost ground.
Suncor Energy Inc. (SU) is an integrated energy company involved in the development of petroleum resource basins in Canada, transportation and refining of petroleum and petrochemical products in Canada and marketing of crude oil and natural gas in Canada and internationally. Due to its integrated structure, SU’s financial performance is directly tied to international oil prices and this has reflected in its profitability performance during the last three years when after a significant 37% drop in its 2009 earnings over 2008, SU roared its way back with the highest every profit of $ 3.6 billion in its entire history, a colossal 228% ascent (on YoY basis). And the story doesn’t end here as the company is expected to come out with yet another bumper year in 2011 i.e. an EPS growth of 82% along with a 15% growth in 2012. In light of these expectations, the year-to-date drop of 14% in the stock's price has only polished its potential as SU is not only trading at a 27% discount in terms of price-to-earnings ratio to its closest competitor, Imperial Oil Limited (IMO), it is also trading at a steep 44% to the industry and this is in addition to a 1.4% dividend yield.
Quicksilver Resources Inc. (KWK) engages in the acquisition, exploration, development, production, and sale of natural gas, natural gas liquids, and oil onshore in North America. It focuses primarily on unconventional reservoirs in fractured shales, coal beds, and tight sands. The company’s “normalized” financial position depicts a healthy picture as the topline of the company grew consecutively during the last five years, depicting average annual growth of 24%. In terms of profitability, though the company suffered considerable losses in 2008 and 2009 by virtue of extensive losses on sale of investments and “unusual” items ($1 billion in each of these years), KWK registered a $430 million profit in 2010. The stock comes last in my list with a negative 42% return since the start of January majority of which occurred in the five trading sessions (from August 2003) leading to its second quarter results date (August 2008) which saw KWK losing three-tenths of its value. This has landed the stock in a very attractive category as, despite expectations of a soft second half in terms of earnings, the long term potential in the company remains intact.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
