The oil and energy sector should be a core holding for most investors as it is something that everyone needs and uses. It is also a sector that is just about guaranteed to grow over the long term as the population increases worldwide. Demand for energy is likely to grow particularly fast in emerging market countries since those consumers are likely to increasingly use energy as their incomes rise. The market has made impressive gains in 2012, so it makes sense to look for value in the energy sector and one way to do that is by considering book value.
Book value is a metric used by many investors to evaluate a stock investment. It is measured by taking the total assets held by a company and subtracting the liabilities. This gives investors some basis for what the dollar value per share might be in the event of a liquidation or a possible asset sale of the company. It makes sense to buy the dips in this sector, especially when you consider that these stocks are trading below book value, which indicates what investors might hypothetically receive in the event of a voluntary liquidation. Here are the undervalued oil and energy stocks to consider:
Alpha Natural Resources (ANR) is a major producer of coal, which it primarily sells to utilities and the steel industry. A number of factors have been driving coal stocks down in recent weeks. The low price of natural gas has impacted the coal business. Utilities can switch fuels and run power plants on natural gas instead of coal, when it is cheaper. China is a major consumer of coal and with the Chinese economy looking weak, and possibly facing a hard landing, the outlook for coal is uncertain in the short run. However, this could be a great time for investors with a long-term outlook to start accumulating this stock, which is now trading for just a fraction of the 52-week high. The stock has a book value of $36.77, so it could rebound significantly once the global economy sees more growth.
Here are some key points for ANR:
Current share price: $20.56
The 52-week range is $15.49 to $61.66
Earnings estimates for 2011: $2.02 per share
Earnings estimates for 2012: 85 cents per share
Annual dividend: none
EXCO Resources, Inc. (XCO) has oil and gas projects in Texas, Louisiana, and the Permian Basin. This company has an interesting history and some heavy-hitters are involved in it. Oil billionaire Boone Pickens is a major shareholder and director of the company. Billionaire Wilbur Ross is also a major shareholder and has recently been acquiring this stock through one of his investment companies. Exco has a solid balance sheet and a book value of $8.07 per share. With natural gas prices expected to remain low, many companies like Exco are allocating future exploration and drilling toward oil. This could improve the profits and reserves outlook in the coming quarters. With this stock trading for just about one-third of the 52-week high, the concerns over weak natural gas prices seem overblown. Longer-term investors could be rewarded in the future by accumulating this stock on weakness now.
Here are some key points for XCO:
Current share price: $6.83
The 52-week range is $6.80 to $21.04
Earnings estimates for 2011: 66 cents per share
Earnings estimates for 2012: 45 cents per share
Annual dividend: 16 cents per share which yields 2.3%
Arch Coal, Inc. (ACI) is based in Missouri and primarily engages in the exploration, mining, and the sale of coal in the U.S.. This stock was trading around $20 per share in November and the share price has been bouncing along the bottom ever since. The company recently announced disappointing financial results, which has put the stock near 52-week lows. In response to industry conditions, which are causing lower coal prices, Arch Coal is planning to cut production. With many companies cutting production in recent weeks, the industry could see improved profit margins in a couple of quarters. This stock appears undervalued and trades below book value, which is $16.70. Arch Coal shares offer a solid dividend yield, plus rebound potential for long-term investors who buy now.
Here are some key points for ACI:
Current share price: $13.86
The 52-week range is $13.09 to $36.99
Earnings estimates for 2011: $1.97 per share
Earnings estimates for 2012: $2.41 per share
Annual dividend: 44 cents per share which yields 3.1%
Vantage Drilling Company (VTG) provides offshore contract drilling services to the oil industry. The fleet consists of four ultra-premium jackup rigs, three ultra-deepwater drillships, and two deepwater semi-submersibles. On the positive side, this company has a strong management team and one of the newest fleets in the industry. One concern for investors is that the debt load is high at about $1.25 billion. The debt issue would keep me from taking a large position in this stock. However, buying on dips and having a small position here makes sense. The stock looks cheap based on book value, which is $2.42 per share.
Here are some key points for VTG:
Current share price: $1.30
The 52-week range is 97 cents to $2.25
Earnings estimates for 2011: a loss of 22 cents per share
Earnings estimates for 2012: a loss of 4 cents per share
Frontline Ltd. (FRO) owns and operates tankers that transport oil, coal and other materials. The shipping industry has been highly cyclical and it has been at a low point recently for many companies. Rates have declined and that has strained the finances and profit margins for Frontline. Because of weak industry conditions and projected losses for the coming year, this stock appears speculative. It also has a heavy debt load of about $2.62 billion. I would not consider a large investment in this stock, but as the 52-week high around $27 shows, when and if conditions improve, these shares have serious rebound potential. The stock trades way below the 52-week high and book value as well, which is $7 per share. Based on the potential risks and rewards, a small position could make sense for certain investors.
Here are some key points for FRO:
Current share price: $4.58
The 52-week range is $2.52 to $27.51.
Earnings estimates for 2011: a loss of about $1.66 per share
Earnings estimates for 2012: a loss of about $1.66 per share
Annual dividend: 8 cents per share, which yields 1.7%
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.