by Stephen Walker
CNBC’s Jim Cramer examined the following five energy stocks to see which were poised to grow and which were worth avoiding. In this article I analyze his picks on a relative value basis. Cramer was right on EOG, DUK, PVR, and AEE but was impatient in his call on CHK. Here is my actionable analysis of his picks:
EOG Resources (NYSE:EOG) - Liked at $102; trading at $101 at the time of this writing.
This developer and producer of both crude oil and natural gas has the largest positions in both the Bakken and Eagleford oil shales. Despite a paltry 0.60% dividend yield, the company’s assets in the Bakken shale alone is worth the stock price. EOG Resources beat earnings estimates by $580 million when it reported $2.98 billion in 3Q revenue, an 82% increase year-over-year. The company generated an $0.83 EPS, beating estimates by $0.07.
Although it’s not the largest company in the sector, EOG Resources’ 59.4% quarterly revenue growth (year-over-year) is marginally higher than its competitors, Anadarko Petroleum (NYSE:APC) and Apache (NYSE:APA), which have a quarterly revenue growth (YOY) of 34.5% and 45.3%. Apache’s 82.94% gross margin is 20% higher than EOG’s and its revenue of $15.92 billion almost doubles its rival. Trading at 10.18 times earnings, Apache is relatively cheap. However, EOG Resources is the way to play the new oil discoveries because it has better assets, strong revenues and room to grow. Cramer was right on EOG.
Chesapeake Energy (NYSE:CHK) - Disliked at $27; trading at $27 at the time of this writing.
Chesapeake Energy-- a producer of natural gas and crude oil-- reported a remarkable quarter and the stock immediately rose 10% as a result. Chesapeake reported a 54% increase in year-over-year revenue and generated $0.72 earnings-per-share, beating estimates by $0.06. Chesapeake’s decision to switch its primary focus from natural gas to crude oil is clearly paying off. The company increased liquids production by 9% and profited handsomely from hedging operations.
Chesapeake showed investors that it could raise cash when necessary by announcing the sale of a 25% stake (650 net acres) of its Utica shale holdings to an undisclosed buyer. The 1.3% dividend yield may not be particularly high, but it is better than EOG Resources’ 0.60% yield. The stock is cheap based on assets, a 13.7% profit margin and a 14.4 price-to earnings ratio. Due to the stock’s run-up on the quarterly report, it may be worth waiting for a pullback before buying Chesapeake. Cramer should simply wait on CHK.
Duke Energy (NYSE:DUK) - Disliked at $21; trading at $21 at the time of this writing.
The electric and gas utility company is not worth buying at these levels. The stock is trading a few cents off its 52-week high, but missed earnings estimates by $120 million. Duke Energy reported 3Q earnings of $3.96 billion, just a 0.05% year-over-year increase, and delivered $0.50 EPS (a $0.04 beat). The 4.8% dividend yield is enticing, and may prove to be worth it if investors can stomach the risk.
Cramer doesn’t like that Duke Energy is heavy in coal. Duke Energy announced it will merge with Progress Energy (PGN) before the end of the year, which may explain why the stock is trading at such high levels while reporting mediocre numbers. The merger appears to be for the combination of assets, as Progress Energy also offers a high dividend (4.6%), but missed EPS estimates by $0.09 and reported a 7.3% decline in revenue, a $0.3 billion miss. Trading near its 52-week high with these numbers gives the impression that the stock has nowhere to go but down. Cramer was right on DUK and I expect this to pan out his way.
Penn Virginia Resources (NYSE:PVR) - Liked at $26; trading at $26 at the time of this writing.
In volatile markets, master-limited partnerships with strong assets are great to own because the business structure forces the entity to distribute the majority of earnings back to shareholders, in order to avoid paying corporate tax rates. Penn Virginia Resources is a coal-based MLP that distributes 70% of its cash flow back to investors. The big draw for Penn Virginia is the 7.7% dividend yield. With enough cash on hand and a quarterly revenue growth of 38.3%, the high dividend is safe. Direct competitor Alliance Resource Partners (NASDAQ:ARLP) has a net income of $222.88 million compared to PVR’s $89.57 million. However, ARLP’s 18.8% quarterly revenue growth and 5% dividend yield gives the advantage to Penn Virginia going forward into the 4th quarter. Penn Virginia Resources is ideal for those looking for dividend protection to help insure the portfolio. Cramer will be right on PVR.
Ameren (NYSE:AEE) - Liked at $32; trading at $33 at the time of this writing.
The St. Louis-based utility holding company offers investors a way to deflect some risk when investing in utility stocks. Ameren’s utility companies generate and distribute both electricity and natural gas, giving it a clear advantage over other, single-focused utility companies. Ameren delivered $1.57 EPS, a $0.30 beat and met estimates with $2.26 billion in revenue. Ameren offers a 4.8% dividend yield and the stock is up 14.54% year-to-date. Ameren executed much more efficiently than rival CenterPoint Energy (NYSE:CNP), which missed revenue estimates by $200 million. CenterPoint Energy saw a 1.4% decline in quarterly revenue growth (year-over-year). Heading into the winter months, Ameren will see an increase in demand from its customers, which should be reflected in a strong 4th quarter. Cramer was right on AEE.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.