7 Must-Own Energy Plays Set To Soar In 2012

Includes: CEO, COP, CVX, SD, SU, SWN, WMB
by: David Alton Clark

The following are seven energy plays for 2012: SandRidge Energy, Inc. (NYSE:SD), Suncor Energy Inc. (NYSE:SU), Southwestern Energy Co. (NYSE:SWN), ConocoPhillips (NYSE:COP), CNOOC Ltd. (NYSE:CEO), Chevron Corp. (NYSE:CVX) and Williams Companies, Inc. (NYSE:WMB).

I posit these energy equities will soon soar from their current shares prices based on macroeconomic, sector and company specific catalysts. These stocks have great stories, good fundamentals and positive facilitators for future growth. However, many are trading at significant discounts due to incessant negative macroeconomic headlines and a lack of confidence from Main Street based on the ever-present deleterious employment picture. Although recent news regarding the U.S. unemployment picture and housing has been positive, I suggest layering into these names as there may be a significant buying opportunity produced by the bumbling EU bureaucrats as they work their way through the eurzone's sovereign debt debacle.

Please review the current oil and gas market highlights, major macro oil and gas catalysts followed by a review of seven energy plays for 2012 well positioned to take advantage of the coming oil shortage.

Current Oil and Gas Market Highlight

Oil rose on Tuesday, as Iranian threats to cut off the key oil shipping route through the Strait of Hormuz added to concerns about supplies from the Middle East, according to a recent Reuters report. Please review the following excerpt:

Facing the threat of further sanctions by the European Union by the end of January over its nuclear program, Tehran said it would stop flows through the Gulf strait - which transits crude from Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Iraq - were such steps to target its oil exports. It was not the first time Iranian leaders have threatened to shut the strait due to the standoff over the nation's nuclear program, and EU leaders have not made explicit calls for an embargo on Iranian crude.

Oil prices gained but did not surge on the threat, which could cut supplies of a third of all seaborne oil. Top oil exporter Saudi Arabia said it was ready to replace Iranian oil if further sanctions halted the OPEC nation's supplies to Europe. Brent crude rose 36 cents to $108.32 a barrel by 10:23 a.m. EST (1523 GMT) in light, holiday trade. U.S. crude gained 75 cents to trade at $100.43 a barrel.

The Iranian comments added to other concerns about shipments from the Middle East, in part due to violence in Iraq. In addition, Syria said on Saturday its oil production had fallen by a third due to international sanctions imposed over its nine-month crackdown on anti-government protests. Worries about supply disruptions were slightly offset by concerns that Europe's debt crisis might have broad consequences on oil demand going far beyond crippling consumption in Europe.

10 Major Macro Oil and Gas Catalysts

The following is a list of my top 10 macro catalysts for oil and gas in 2012.

  1. Emerging market countries (China and India) increasing strategic reserve stockpiles
  2. Kazakhstan unrest sparks worries regarding 5 million BPD production going to China
  3. Middle Eastern instability due to Iran, Iraq and Syria
  4. Chinese and emerging market demand growth rising
  5. U.S. Fed and ECB printing presses working overtime
  6. U.S. economy showing positive signs of recovery
  7. U.S. dollar weakness
  8. Better than expected consumer confidence statistics
  9. Recent drawn downs of U.S. reserves
  10. OPEC decision to not increase production

Seven Oil Plays For 2012

Current Performance Chart

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Charts provided by Scottrade.com.

Company-Specific Catalysts and Fundamental Statistics

SandRidge recently announced it has entered into a Joint Venture with a subsidiary of Repsol YPF, S.A., a leading international energy company based in Madrid, Spain. Under the agreement, SandRidge will sell an approximate 25% non-operated working interest, or 250,000 net acres, in the Extension Mississippian play located in Western Kansas and an approximate 16% non-operated working interest, or 113,636 net acres, in its Original Mississippian play.

Fundamental Statistics

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Suncor Energy Inc. released its 2012 guidance recently, which includes $7.5 billion in capital spending and planned average production of 530,000 to 580,000 barrels per day. This includes an expected increase of approximately 12% in oil sands production and an increase of more than 30% in sweet synthetic crude oil production.

Fundamental Statistics

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Southwestern recently announced its planned capital investment program and guidance for 2012. The company's total capital investment program in 2012 is planned to be approximately $2.3 billion, compared to approximately $2.1 billion in 2011. The company's 2012 capital program includes approximately $2.0 billion for its exploration and production segment, $210 million for its midstream segment and $90 million for corporate purposes.

Steve Mueller, President and Chief Executive Officer of Southwestern Energy stated:

I am excited about what lies ahead for Southwestern Energy in 2012. Our low-cost operations and financial flexibility, along with our significant positions in two world-class shale plays and our drilling in several New Ventures plays, give us the ability to create significant value for our stockholders.

Fundamental Statistics

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ConocoPhillips recently reported on the progress of its three-year strategic plan to improve returns and create value for its shareholders. The company also announced a 2012 capital program of $15.5 billion and a program to repurchase up to an additional $10 billion of the company's common stock. The company additionally provided an update on its $15-20 billion asset divestiture program for 2010-2012.

Jim Mulva, chairman and chief executive officer, said:

We have made strong progress on the plan set out in 2010 to enhance our business through a disciplined approach to capital investment, maintaining a strong balance sheet and growing distributions to our shareholders. We continue to optimize the portfolio, selling non-core holdings and allocating investments to the highest-returning projects to position our business for improved returns and greater value.

Fundamental Statistics

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CNOOC recently announced that CNOOC Luxembourg S.a r.l, an indirect wholly-owned subsidiary of the company, has completed its acquisition of OPTI Canada Inc. ("OPTI"). The total value of the consideration is approximately U.S. $2.1 billion.

Mr. Li Fanrong, newly appointed Chief Executive Officer of the company, commented:

Closing of this acquisition demonstrates that the company has further stepped into the oil sands business, which has become one of the important assets to the company's global portfolio. Through the partnership with Nexen, the company expects to fully exploit the growth potential of the Long Lake Project and the three other jointly owned oil sands leases. We believe that the project will contribute to the company's mid to long term reserve and production growth.

Fundamental Statistics

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Chevron recently announced a natural gas discovery by its Australian subsidiary in the Exmouth Plateau area of the Carnarvon Basin, offshore Western Australia.

The Vos-1 well encountered approximately 453 feet (138 meters) of net gas pay. Located in the WA-439-P permit area approximately 186 miles (300 kilometers) from Exmouth on the Western Australian coast, the well was drilled in 4,869 feet (1,484 meters) of water to a depth of 12,461 feet (3,798 meters).

Fundamental Statistics

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Williams recently announced it has agreed to acquire the Laser Northeast Gathering System and other midstream businesses from Delphi Midstream Partners, LLC for approximately $750 million. Delphi Midstream Partners, LLC is owned by American Securities LLC and management. The Laser Gathering System is currently comprised of 33 miles of 16-inch natural gas pipeline and associated gathering facilities in Susquehanna County, Pa., as well as 10 miles of gathering pipeline in southern New York. The acquisition is supported by existing long-term gathering agreements that provide acreage dedications and volume commitments. As production in the Marcellus increases, the Laser system is expected to reach a capacity of 1.3 billion cubic feet per day (Bcf/d).

Rory Miller, senior vice president of Midstream for Williams Partners, said:

The acquisition of the Laser system continues our strategy of safely and reliably serving producers through large-scale midstream infrastructure in the Marcellus Shale and other basins.

Fundamental Statistics

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With the current tumultuous events in the Middle East bringing attention to the mounting energy requirements of the emerging economies, in addition to the burgeoning necessities of the recovering developed economies, the fact that demand is outstripping supply appears to be blatantly obvious. All the easy oil and gas has been discovered, recovered, depleted and expended. We are now left with on shore "fracking" and deep sea drilling which are much more expensive endeavors, ultimately driving the price of a barrel of oil sky-high sooner rather than later. The emerging markets of the globe are just beginning to demand their fair share on top of many other factors. Think of this fact, even with the sad state of the current global economy, we are at $100 a barrel oil.

Based on these facts, the future of companies in the energy industry seems brighter than ever. We all know that past performance is not a surefire indicator of future success. On the other hand, with the finite nature of oil resources and the seeming tipping point of the oil supply/demand equation coming to fruition sooner rather than later, the success of these companies appears certain. What do you think is going to occur when the economies of the world begin to recover and emerging markets gain viable traction? You can kiss $100 a barrel oil goodbye forever.

Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CVX, SU, SD, WMB, SWN, COP, CEO over the next 72 hours.