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Hope springs eternal, even though oil doesn't. Unfortunately, not all project outcomes meet expectations or justify valuations. This could be a problem for Cobalt International Energy (NYSE:CIE), an exploration-phase oil company whose value rests on the prospect of future production in its deep water projects. Should investors bet big on a company which has yet to prove the value of its operations and will likely need to raise funds through share offerings as it did recently?

No. Investors should show a preference for energy companies with existing sales and operations. Regardless of public interest, the actual earnings and future cash flows to equity will determine the value of a stock. The future financial potential of a stock can be gauged by using metrics to determine how cheaply a stock is priced, its ability to weather hardship, and its growth potential.

As alternatives to CIE, consider the following oil and gas stocks with strong track-records and solid credit scores:

Ticker

Company

Industry

10-Year Average ROE

Altman Z-score

APL

Atlas Pipeline Partners

Oil & Gas Pipelines

4.2%

3.14

CPX

Complete Production Services

Oil & Gas Equipment & Services

5.1%

3.56

DK

Delek US Holdings Inc.

Oil & Gas Refining & Marketing

11.0%

4.16

HAL

Halliburton Company

Oil & Gas Equipment & Services

8.2%

4.75

HFC

HollyFrontier Corporation

Oil & Gas Refining & Marketing

26.0%

3.17

NR

Newpark Resources Inc.

Oil & Gas Equipment & Services

3.3%

3.31

OIS

Oil States International Inc.

Oil & Gas Equipment & Services

15.7%

3.74

CIE

Cobalt International Energy

Independent Oil & Gas

-8.6%

N/A

These alternative stocks are all categorized as "safe" according to the Altman Z-score,* indicating that they are not considered bankruptcy risks. Moreover, the average 10-year return on equity demonstrates that APL, CPX, DK, HAL, HFC, NR, and OIS have track-records of growing shareholder wealth. It is clear from these two metrics that each of these alternatives is a quality stock.

What's more, these stocks are cheaper and have excellent growth prospects:

Ticker

P/E

P/S

P/B

EPS growth past 5 years

EPS growth next 5 years

Sales growth past 5 years

APL

7.15

1.52

1.57

32.5%

11.0%

22.9%

CPX

13.18

1.33

2.54

8.3%

20.0%

14.7%

DK

5.28

0.12

1.28

7.8%

15.0%

18.2%

HAL

10.6

1.28

2.41

9.6%

28.0%

13.9%

HFC

5.86

0.48

1.45

24.8%

22.2%

30.9%

NR

10.04

0.77

1.48

16.1%

11.0%

8.3%

OIS

14.17

1.23

2.17

8.5%

10.5%

12.6%

CIE

N/A

N/A

6.05

N/A

N/A

N/A

These alternative stocks show how there is no need to risk capital on undeveloped fossil fuel deposits when there are many stocks with fantastic growth potential trading at reasonable valuations. These stocks will benefit from the same trends in energy inflation as Cobalt International Energy and stock market multiple expansion without the risk of an unproven startup project. There is no reason to take on the extra risk of developing new operations on an undeveloped site when these established companies with actual production, revenues, and earnings are trading at attractive valuations.

If optimism could always be converted into production, revenues, earnings, and cash outflows then we would all be filthy rich. However, in the real world investors should focus on established companies with actual operations and real-world earnings. Choose reality over hope.

Please read the article disclaimer.

Source: 7 Stocks With Real Revenues To Clobber Cobalt Interntional