6 Value Energy Stocks Based On Earnings Power

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 |  Includes: BHI, BTUUQ, DNR, EOG, NBR, TSO
by: Stookle

Company earnings are very closely followed by many investors. Discounted earnings model is a popular model to estimate the worth of a company. The amount of future earnings from the business is estimated for each forecasted period and discounted at the appropriate discount rate to determine their present value. The present value of each period of estimated earnings for all future years are then added to determine the total present value.

The last step determines the perpetual value. It's the residual value of the business at the end of the period of years being estimated. This value is discounted to its equivalent present value and added to the present value of the future earnings to determine total intrinsic value. Some investors like adding the book value to this number. We intentionally eliminated the book value as we are evaluating the companies based on earnings power. This model is commonly used to price IPOs and to evaluate company's worth in a M&A scenario.

A rule of thumb for stock valuation that is popular on Wall Street is to calculate the sum of the expected growth rate of a stock's earnings plus its dividend yield and divide this by its P-E ratio. The higher the ratio, the better. Famed money manager Peter Lynch recommends investors select stocks with a ratio of 2 or higher and avoid stocks with a ratio less than 1.

The following is the list of attractive Energy sector companies in S&P500 valued based on both the above criteria. *We assumed a discount rate of 12% and the growth will stabilize after the next 5 years and enter a constant phase.

Baker Hughes Inc (NYSE:BHI): Baker Hughes Incorporated is engaged in the oilfield services industry. Baker Hughes is a supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry. The Company also provides industrial and other products and services to the downstream refining, and process and pipeline industries. The company has a ROA of 4.7% and a ROE of 7.6%. The company is trading with a ROIC of 6.0%. BHI is expected to grow at 25.99 % over the next 5 years. BHI is expected to earn $5.76 per share next year. The company is valued at $90.7 using DEM. The company has a GY2PE of 2.76. BHI is currently trading at $52.40, raising $1.4 or 2.7% this year.

Nabors Industries Ltd (NYSE:NBR): Nabors Industries Ltd. is an oil, natural gas and geothermal drilling contractor operating on land throughout the Americas, the Middle East, the Far East, and Africa. The company also provides many support services for both offshore and onshore oil drilling and for well-servicing operations. The company has a ROA of 0.9% and a ROE of 1.8%. The company is trading with a ROIC of 1.0%. The stock is expected to grow at 17.33 % over the next 5 years. The company is expected to earn $2.76 per share next year. The company is valued at $36.5 using DEM. The company has a GY2PE of 1.98. NBR is currently trading at $22.00, raising $3 or 16% this year.

EOG Resources (NYSE:EOG): EOG Resources, Inc. and its subsidiaries engage in the exploration, development, production and marketing of natural gas and crude oil primarily in the United States, Canada, the Republic of Trinidad and Tobago, the United Kingdom and the People's Republic of China. The stock has a ROA of 0.8% and a ROE of 1.6%. EOG is trading with a ROIC of 1.1%. EOG is expected to grow at 53.70 % over the next 5 years. The company is expected to earn $6.78 per share next year. The stock is valued at $176.7 using DEM. The company has a GY2PE of 2.72. EOG is currently trading at $116.50, raising $15 or 15% this year.

Denbury Resources Inc (NYSE:DNR): Denbury Resources Inc. engages in the acquisition, exploitation, drilling and extraction of oil and natural gas properties in the Gulf Coast region located in Mississippi, Texas, Louisiana and Alabama. The company has a ROA of 4.1% and a ROE of 8.6%. The company is trading with a ROIC of 5.4%. The stock is expected to grow at 36.10 % over the next 5 years. The company is expected to earn $1.64 per share next year. The company is valued at $31.4 using DEM. The company has a GY2PE of 2.70. DNR is currently trading at $20.72, raising $4.4 or 27% this year.

Tesoro Corp (NYSE:TSO): Tesoro Corporation is an independent refiner and marketer of petroleum products. Tesoro, through its subsidiaries, operates seven refineries in the western United States with a combined capacity of approximately 665,000 barrels per day. TSO has a ROA of -0.4% and a ROE of -.9%. TSO is trading with a ROIC of -.6%. The company is expected to grow at 9.41 % over the next 5 years. TSO is expected to earn $3.55 per share next year. TSO is valued at $40.5 using DEM. The company has a GY2PE of 1.18. TSO is currently trading at $28.73, raising $4.7 or 19% this year.

Peabody Energy Corp (BTU): Peabody Energy Corporation and its subsidiaries engage in the exploration, mining and production of coal. Peabody mines and sells thermal coal to electric utilities and metallurgical coal to industrial customers. The stock has a ROA of 7.3% and a ROE of 18.4%. BTU is trading with a ROIC of 11.1%. The company is expected to grow at 7.94 % over the next 5 years. The stock is expected to earn $4.74 per share next year. The company is valued at $50.9 using DEM. The company has a GY2PE of 1.00. BTU is currently trading at $35.76, falling $0.51 or 1.4% this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.