Energy Stock Picks: 2 'Buys', 1 'Strong Buy'

 |  Includes: ARCH, BP, HAL, OXY
by: Takeover Analyst

What follows is a list of energy companies with various degrees of upside. While coal has the most volatility, oil well service firms are arguably even more risk discounted due to the BP oil spill disaster. In my view, all of these companies are well positioned to gain from a full recovery and represent meaningful value plays. As industrial activity grows, top-line momentum at each of these firms will drive back investors and boost multiples. All ratings are sourced from NASDAQ.

Occidental (NYSE:OXY)

Occidental trades at a respective 10.5x and 9.3x past and forward earnings with a dividend yield of 2.5%. Consensus estimates for Occidental's EPS forecast that it will decline by 0.5% to $8.35 in 2012, grow by 12.7% in 2013, and then fall by 1% in 2014. Assuming a multiple of 12x and a conservative 2013 EPS of $9.36, the stock would hit $112.32 for 28.1% upside.

Analysts currently rate this oil & gas company a strong buy. Most of Occidental's production is in liquids, which enables to exploit Brent crude trends while volume increases. Management has done a stellar job in cutting costs over the years and will be able to leverage that strength with increases to scale. Operating cash flow of $12.3B also enables takeover activity for even greater growth.

Arch Coal (ACI)

Arch Coal trades at a respective 18.8x and 62.2x past and forward earnings with a dividend yield of 1.5%. Consensus estimates for Arch Coal's EPS forecast that it will turn negative at -$0.42 in 2012 and then enter positive territory the following year before hitting $0.77 in 2014. Needless to say, investors are in for a rocky ride.

Analysts currently rate the company around a "hold"; but, I rate it a "buy". 26 of the 27 revisions to EPS have gone down for a net change of -154.8%. In fact, over the last 12 months, Arch Coal has lost 73.9% of its value. With the stock near its 52-week low and a beta of 1.8, the potential for high risk-adjusted returns is substantial.

Halliburton (NYSE:HAL)

Halliburton trades at a respective 9.6x and 8.2x past and forward earnings with a dividend yield of 1.1%. Consensus estimates for Halliburton's EPS forecast that it will grow by 4.8% to $3.52 in 2012 and then by 12.8% and 18.9% more in the following two years. Assuming a multiple of 12x and a conservative 2013 EPS of $3.91, the stock would hit $46.92 for 44.7% upside.

Not surprisingly, Halliburton is rated a "strong buy" on the Street. In my view, it is overly discounted due to the oil spill, which says nothing about future performance. The company is led by a top management team that more than doubled the stock price from late 2008 to July 2011 before the BP spill became dramatized by a US investigative report that deemed Halliburton was partially culpable. If investors are willing to think in terms of value and less in terms of sensationalism, Halliburton will provide a nice ride to prosperity.

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

Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.