Investors considering energy stocks today encounter a turbulent market as commodity prices continue to decline amidst a faltering global economy. But this challenging macro environment presents an opportunity for investors to buy into energy companies when prices are depressed.
We have highlighted two companies below -- Halliburton (HAL) and BP (BP) -- with rock solid businesses that are trading at attractive valuations and stand to benefit from a turnaround in oil and gas prices.
But there is one company that we believe investors should avoid. In our view, Chesapeake Energy (CHK), despite a compelling valuation and considerable upside, is simply not worth owning given the risk of further revelations of management indiscretion.
Halliburton
Price: $27.21
52Wk Range: $26.28-57.77
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Source: Yahoo Finance
Halliburton's stock price has been hit hard recently under the weight of declining oil prices, a tumultuous international economy, and an ongoing legal battle with BP over liability for the 2010 Gulf of Mexico oil spill. As a result, Halliburton is trading at its 52-week lows.
Trading at 8.4 times trailing earnings and 7.3 times forward 2013 earnings, Halliburton's stock is certainly not expensive, although some of the large oil and gas producers trade at cheaper multiples. As examples, Petrobras (PBR) trades at 6.9 times trailing and 5.8 times forward earnings, a range very similar to Total S.A. (TOT) and ConocoPhillips (COP). However, compared to more direct competitors, like Baker Hughes (BHI) and Schlumberger (SLB), Halliburton is priced more attractively relative to earnings. Baker Hughes boasts a price that is 9.6 times trailing and 8.5 times forward earnings, respectively, while Schlumberger trades at 15.2 times trailing and 11.5 times forward earnings, respectively. Halliburton also has a Return on Assets (ROA) of over 14% TTM, which is among the best in its peer group.
BP
Price: $38.24
52Wk Range: $33.62-48.34
Source: Yahoo Finance
BP's struggles following the 2010 Gulf oil spill are well documented, and the cost of that catastrophe to the company has not entirely been worked out. However, it would seem that a majority of the expense is both priced in to the stock at this point and either paid out or set aside by the company. That leaves a heavily discounted oil and gas giant in BP.
The fundamentals paint an appealing picture. With a trailing P/E of 5 and a forward P/E of 6.4 -- and trading at book value -- BP appears inexpensive. BP also boasts healthy free cash flow and a substantial dividend yield of around 5%.
Chesapeake Energy
Price: $17.93
52Wk Range: $13.32-35.75
Source: Yahoo Finance
We have history with Chesapeake. We've been owners off and on over the past six months, believing the valuation was right and the upside of potentially rising natural gas prices was worth the risk. After the severe earnings miss in May, we stood by the company, believing the scandals of the past had been resolved and a brighter future lay ahead. The last month and a half has indeed presented a mini rally for Chesapeake following its April collapse, as the stock rose from a low of $13.32 in mid-May to $19 in the second half of June. However, with the newest allegations of bid-rigging heaped onto CEO Aubrey McClendon's loan scandal, we've determined we've been burned by one too many Chesapeake scandals, and we have completely sold our stake in the company. We recommend avoiding Chesapeake.
Although its valuation may seem compelling, the duality of an uncertain financial future resulting from low oil and gas prices and the constant threat of corporate scandals rocking shareholders makes Chesapeake a stock to steer clear of, in our opinion. Additionally, there are compelling investments in the market right now that serve as viable alternatives to Chesapeake, and many of these alternatives, along with being less scandal-prone, offer a more diverse strategy in the industry, thereby mitigating the risk that the investment will go sour if gas prices remain low.
In addition to BP and Halliburton, our picks include gas-heavy oil and gas driller Devon Energy (DVN), global energy equipment and services company Weatherford International (WFT), oil and gas mega-corp Exxon Mobil (XOM), and global integrated energy company ConocoPhillips .
