By Tim Plaehn
Energy companies have faced volatile prices in 2011. Crude oil is nearing the end of the year at about the mid-point of the range for the year and natural gas has declined significantly over the second half of the year. Energy stocks were a top sector in the 2011 third quarter and are poised to provide investors with very good returns for 2012. One benefit for investors is that the Wall Street analysts do not have a very good handle on where the earnings for energy companies will be in the new year. These five energy stocks have attractive upside potential for the new year.
Suncor (NYSE:SU) holds the largest proven and probable reserves in the Canadian oil sands production area. With over three decades worth of reserves in the oil sands, higher crude oil prices result in a leveraging of profits for the company. Beyond the oil sands, Suncor is an integrated oil company able to bring added value to its oil production through refined petroleum products from the company owned refineries. Of Suncor's crude production, three-quarters comes from oil sands and the remaining amount is produced off the east coast of Canada, and internationally. With a cash cost to produce oil sands oil of less than $40 per barrel, the company plans to increase production from the current 500,000-barrel per day range to 1 million-barrels per day in 2020. The company has $3 billion in cash available for further development.
Andarko Petroleum (NYSE:APC) is a $37 billion oil and gas production company with a global portfolio of exploration and production sites. The company focuses on mega projects with drilling programs off Brazil, east Africa, and Southeast Asia, which have the potential to add very large amounts of proven reserves to Andarko's asset and production base. In the third quarter of 2011, the company reached an agreement with British Petroleum (NYSE:BP) concerning last year's Deepwater Horizon disaster. The agreement reduces uncertainty in regards to Andarko's liability and should allow the stock to reach its appropriate – and higher – value in 2012.
Southwestern Energy (NYSE:SWN) is an aggressive play on higher natural gas prices in 2012. This company has demonstrated growing natural gas production from its wells in the Fayetteville, and Marcellus shales. In the 2011 third quarter, gas production from Southwestern Energy was 22 percent higher than a year earlier. For the third quarter, the company's pool cost amortization rate was $1.29 per thousand cubic feet, 6 cents lower than a year earlier. The Henry Hub spot price for gas is at $3.30 per mcf compared with near $5.00 earlier in the year. A gas price rebound would leverage the profits for Southwestern Energy in 2012 and leverage an investor's position in shares of the stock.
Denbury Resources (NYSE:DNR) takes a unique approach to crude oil production. The company extracts oil from "used" oil wells using a carbon dioxide enhanced oil recovery – EOR – technique. CO2 EOR is a tertiary – third level – and can pull almost as much oil out of a well as the original extraction period and a follow-on secondary extraction. The challenge is obtaining large amounts of CO2 and building pipelines for the gas to the oil fields. Denbury has completed these requirements for the oil fields it has under contract in Montana, and Mississippi. Potential reserves for the company could exceed 10 billion barrels. The Denbury tertiary production from existing wells is forecast to increase at 13 percent to 15 percent compounded for the next 10 years. The company's technique makes it a very low-cost crude oil producer.
Quicksilver Resources (NYSE:KWK) is the contrarian or turn-around play on this list of energy companies for 2012. The company lost almost half of its market value on the release of the second-quarter results in early August 2011. A relatively high level of debt has the market concerned whether Quicksilver Resources will be able to stay profitable in a period of low natural gas prices. For the contrarian investor, this stock has two items that point toward higher values in 2012. First, the current market cap makes Quicksilver the cheapest of the natural gas production companies on a valuation per proven reserves basis. If gas prices increase next year, the stock could easily double. Second, company management has announced plans to form a MLP and start dropping down producing assets into the MLP, raising cash from MLP unit sales and reducing company debt.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.