This article looks at 5 of the cheapest energy stocks out there. I’m not going to lie, I like all of them. These companies all are starting to rebound with oil prices. Strong growth indicators in the United States make it reasonable to believe this expansion in energy prices will continue. Uncertainty in Europe is obviously a concern, but most these companies run on longer time lines. This means declining oil prices don’t immediately hurt their business. Aside from Petrobras (PBR) and Penn West (PWE), these others are drilling contractors and service providers. New wells are generally drilled until completion, which means these companies get paid to finish drilling while integrated oil companies may be scaling back. The quarterly reports for some of these companies show strong capital investment, which could mean the companies are gearing up for bigger business. These companies all are ready to put the lingering effects of the recession and the recent drop in energy prices behind them and start growing. Analyzing these companies, I couldn’t help but be excited. Read on and see if any of these investments look good to you too.
Oil & Gas giant Petrobras has an essential monopoly in Brazil. The company owns upstream and downstream oil operations in Brazil and internationally. Currently trading at 7.7 times forward earnings, this stock looks like a great buy. The chart showing a classic inverted head and shoulders pattern gives more guidance that now is a good time to buy. Competing companies like Diamond Offshore Drilling Inc. (DO) and Whiting Petroleum Corp. (WLL) are trading for substantially higher multiples at 9.4 and 13.3 times forward earnings respectively. The dividend yield at 0.6% is a little smaller than value investors would want but the company still looks attractive. The important thing to understand is that this company is partially owned by the Brazilian government. The government has significant control over this company. This presents positives and negatives. Do your due diligence but this company looks like a strong buy.
Nabors Industries Ltd. (NBR)
The future outlook for the largest land drilling contractor in the world, Nabors Industries, looks great. This company does land drilling all over the world. Fracking is a specialty of theirs which is why the future looks bright for the company. Fracking has been picking up in the United States and the continuing discovery of shale gas wells will only allow that growth to continue. The company currently trades for 12.0 times forward earnings, so what could be wrong? Before we make any investments a closer look is necessary. While the company’s outlook is great, problems from the Great Recession’s collapse of energy prices still has lingering effects. The company is highly leveraged and rapidly trying to pay back emergency loans the company had to take during the recession. This is evident in the cash flow statement. Cash and equivalents were cut in half over the last quarter from paying back debt. The company is making money and earnings look good, but when interest expense is twice as large as net profit, as it was in 2010, its obvious problems still linger. Going forward debt repayments should lower this interest expense and open up significantly higher profits. Assuming drilling keeps expanding this is likely to occur. Value investors should take a close look at this one. High interest expenses have subdued earnings but these expenses should be declining. When they do this stock should take off.
Patterson-UTI Energy Inc. (PTEN)
Like most energy companies the Great Recession really hurt earnings for land drilling services provider, Patterson-UTI Energy. Since having negative earnings in 2009, the company’s earnings are starting to get back on track. Now trading for 9.9 times forward earnings, this company is starting to look attractive again. This multiple is significantly lower than competitors Baker Hughes Incorporated (BHI) and Helmerich & Payne Inc. (HP) at 12.4 and 12.1 times forward earnings, respectively. Like Nabors, Patterson-UTI has shelled out a lot of cash over the last quarter. Instead of paying back debt like Nabors did, Patterson-UTI’s cash mainly went to capital expenditures. The trouble is these expenditures brought cash levels extremely low. This could be a sign of too much risk-taking or that management believes the future outlook is bright and this is the time to invest heavily in capital. Only time will tell, but the outlook for the industry and company look good. This is another company worth looking at.
Ensco PLC (ESV)
The three companies mentioned above all experienced big declines at the beginning of August this year, as did London-based offshore drilling contractor Ensco PLC. While these other companies have been waiting to rebound from the August decline, Ensco PLC is well on its way. Currently trading for 16.1 times forward earnings, this rebound is evident. However, the company is still cheaper than competitors Noble Corp. (NE) and Transocean Ltd. (RIG) at 22.8 and 25.0 times forward earnings respectively. Ensco yields 2.73%, which is better than any of the companies profiled so far. For value investors, the buying opportunity for this company may have passed. Serious due diligence is necessary to see if this company really warrants a 16.6 multiple of forward earnings. If growth prospects are deemed strong, this stock has already shown it can keep moving up.
Penn West Petroleum Ltd. (PWE)
Currently rebounding from a longer decline than the previously overviewed companies, Canadian oil exploration and drilling company Penn West Petroleum should be exciting to value investors. Shares trade for 15.4 times forward earnings and offer a 5.8% dividend yield! The valuation is in the middle of comparable companies Encana Corporation (ECA), which trades for 41.3 times forward earnings, and Suncor Energy trading for only 9.0 times forward earnings. What makes Penn West exciting though is the tremendous dividend. The company’s 19.7% profit margin is a sign of stability, as is the company’s ownership of some very favorable light-oil fields in Canada.
Although the multiple is a little high, the dividend is great. This company looks very stable and is in a strong position to grow in the future.