By Robert Gordon
Some day, the United States will realize enormous investments are needed to supply commercial amounts of wind, solar and geothermal energy. But until that day arrives, North Americans' appetites for oil and natural gas will go on unabated. Not only that, but even with ample supplies of alternative energies, there will always be some appetite for oil and natural gas until recoverable fossil fuels no longer exist. I will look at five oil and gas related stocks, searching for those with appeal here and now.
Suncor Energy, Inc (SU)
SU is listed on the NYSE, and was recently trading at about $33 per share. Its 52-week range is from $48.53 to $22.55. SU has a market capitalization of $52 billion, and a trailing P/E of 13.6. It currently pays a dividend of $0.44 per share, for a yield of 1.4%
Suncor had an outstanding third quarter. Operating income, after excluding special one-time charges, tripled from the year earlier quarter to $1.79 billion, or $1.14 per share. SU attributed the growth to development of its oil sands properties. Much investment has been made, and is being planned in the United States to properly refine the heavy oil sand crude, which while beneficial from a domestic energy security standpoint, is an environmental disaster. Analysis has shown the oil locked up in Canadian tar sands rivals the oil reserves of Saudi Arabia.
SU has ample cash on hand (more than $3 billion) and quality cash flow. From an investing standpoint, it also has a Beta of 1.4. Speculative investors should do further investigation.
Anadarko Petroleum Corp. (APC)
APC is listed on the NYSE, and was recently trading at about $84 per share, near the top of its 52-week range of from $84.42 to $57.11. It has a market capitalization of $41.8 billion. It lost money over the past 12 months, so it has no P/E. It does pay an annual dividend of $0.36 per share, for a yield of 0.40%
There has been a dark cloud over APC for the 18 months following the Gulf oil disaster. APC had a 25% operating interest in the striken Deep Horizon well. Bp, PLC (BP) sought $ 6 billion from APC, but settled in October, 2011, for $4 billion, plus APC is entitled to 15% of any other money BP recovers. While this one-time charge is a huge hit against APC's quarterly and 2011 annual earnings, it also removes the negative cloud. APC had been trading at a discount to other oil companies; that drag should now disappear.
Due to that BP settlement payment, APC lost a little over $3 billion in its third quarter. But despite the poor bottom line, APC still generated a healthy $1.9 billion in discretionary cash in its third quarter, a 50% increase from the year-earlier quarter.
The albatross of the Gulf disaster behind it, and with new discoveries in the northern North Sea and offshore Brazil, APC is in position to generate healthy returns. Further investigation is warranted.
Southwestern Energy Company (SWN)
SWN is listed on NYSE, and was trading recently at about $42 per share, near the midpoint of its 52-week range of from $49.25 to $30.94. Its market capitalization is $14.6 billion, and its trailing P/E ratio is 23. It pays no dividends.
In its third quarter of 2011, SWN reported profits rose 9% from the year earlier period, to $175 million. It managed to overcome the drop in natural gas prices by increasing its production. Its profit margin of 22% and its return on equity of 19% are signs management is putting SWN's assets to work effectively.
SWN's stock price has rocketed from about $32 per share in early October, 2011. It has plenty of room to move, but I would like to see it pull back more, and obtain a lower P/E, before investing.
Denbery Resources, Inc. (DNR)
DNR is listed on the NYSE, and was recently trading at about $16.50 per share. Its 52- week range has been from $26.03 to $10.20, and a market capitalization of $6.6 billion. Its trailing P/E is 23, and it does not pay a dividend.
DNR had an excellent third quarter. Its stated gross income was up ninefold from the year earlier quarter, to $276 million. Even adjusting to omit one-time items in both periods, income still rose 300%. DNR has a bright future as well, as efficiencies and new findings in its natural gas business have increased proven reserves by trillions of cubic feet in the past few years. All this, while digesting its $4.5 billion “merger” with former competitor Encore Acquisition in 2009.
As DNR further integrates the Encore merger both topline revenue and bottomline profits will improve, much as the third quarter demonstrated. That, in turn, will drive down its P/E ratio. DNR has a high beta (1.45) and is not for the faint of heart, but a patient investor can be rewarded.
Quicksilver Resources, Inc. (KWK)
KWK is listed on the NYSE, and was trading recently at about $7.50 per share, near the lower end of its 52-week range of from $15.98 to $6.17. It has a market capitalization of $1.27 billion, and a trailing P/E ratio of 3.4. It pays no dividend.
KWK is also focused on the production of natural gas in this country. So why is its P/E a small fraction of all the others? In its third quarter of 2011, KWK's stated earnings was 31% higher than the year-earlier quarter, but excluding one-time factors, income actually fell 79%. KWK was impacted by the same fall of natural gas companies as were the others in this article
KWK's balance sheet is a mess. It had on October 1, 2011, $2 thousand dollars in cash. It also carries nearly $2 billion in debt. And it has no quality, non core assets to sell in order either to boost cash or whittle down the debt. Because of the extreme leverage in that balance sheet, KWK stands to benefit more than its competitors from a rise in natural gas prices. But with sustained ample supplies, any long-term rise in natural gas prices is hard to see. I would avoid investing in KWK.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.