The energy sector has not been spared from the recent market selloff. Energy stocks have been taken to the woodshed, so to speak, over the past quarter. Oil and natural gas prices fell as a potential deal between the U.N. nuclear watchdog group and Iran on Tehran's nuclear program eased fears of oil supply disruptions, while the eurozone debt crisis continued to threaten economic growth. The expectation of a global meltdown emanating from the Eurozone coupled with cooler heads prevailing in the Middle East led to a drastic drop in oil and natural gas prices and a selloff of energy stocks. The problem is these types of developments are transitory.
In recent weeks these stocks have begun to surge to the upside reversing the trend from down to up. The ECB has quelled fears of a Eurozone implosion and the smoldering Middle Eastern tinderbox appears poised to reignite for the umpteenth time. I posit these fundamentally strong energy companies may present buying opportunities. The following five energy stocks have strong fundamentals, are profitable and some pay dividends.
These five companies are trading below 52 week highs and high substantial potential upside based on analysts' mean price targets. The companies are trading on average 28% below their 52 week highs and have 25% potential upside based on their analysts' mean target prices. This is good news, however, by itself means little.
What's more, these stocks have some very positive fundamentals and a few just recently beat analysts' estimates regarding earnings and guidance. All five have PEG ratios close to one, which is considered undervalued.
Now we are getting closer to our goal of discovering buying opportunities, nevertheless, we aren't done yet. Finding energy stocks trading significantly below consensus and 52 week highs with strong fundamental data is only the first step to finding winners that may provide alpha. We need to dig deeper.
In the following sections, we will take a closer look at these stocks to determine if the mean target prices are justified. We will perform a review of the fundamental and technical state of each company and analyze the trends.
Additionally, we will discern if any headwinds or catalysts are on the horizon that may influence growth based on sector, industry or company specific developments. The following table depicts summary statistics and Friday's performance for the stocks.
Chesapeake Energy Corporation (CHK)
Chesapeake is trading well below its consensus estimates and its 52 week high. The company is trading 48% below its 52 week high and has 29% potential upside based on the analysts' mean target price of $23.08 for the company. Chesapeake was trading Friday for $17.89, basically flat for the day.
Fundamentally, Chesapeake has several positives. The company has a forward P/E of 13.06. Chesapeake is trading for 72% of book value. According to Finviz.com, EPS next year is expected to rise by 302%. The company pays a dividend with a yield of 1.96% and has a PEG ratio of 0.89.
Technically, CHK has performed well since mid-May. The stock has been in a well-defined uptrend posting higher highs and higher lows. The stock has been highly volatile as news regarding past digressions and reports of new discovers trickle out.
Recently, two Michigan state legislators called on state officials to step up investigations into possible collusion between Chesapeake and Encana (ECA). Emails appeared to show top execs discussing how to avoid bidding against each other in a 2010 public land auction in Michigan and in prospective land deals involving at least nine private landowners in the state.
The company is due to report earnings after the bell on Monday. I can't get on board until after earnings. If I owned the shares I wouldn't sell at this point. CHK is a hold pending the earning results and the corresponding conference call. If things go well I may pull CHK out of the penalty box.
Occidental Petroleum Corporation (OXY)
OXY is trading below its consensus estimates and its 52 week high. The company is trading 16% below its 52 week high and has 27% potential upside based on the analysts' mean target price of $112.33 for the company. OXY was trading Friday for $88.57, up over 3% for the day.
The company has many fundamental positives. OXY's PEG ratio is .90. OXY pays a dividend with a yield of 2.44% and a payout ratio of 22.97%. OXY has a forward P/E ratio of 11.49. OXY is trading for 1.85 times book value. ROE is 18.74% and the net profit margin is 26.02%.
Technically, OXY looks good. The stock just broke through long term resistance at $86.00 effectively changing the trend from down to up. All three major moving are sloping upward. The stock appears to have put in a bottom in July.
OXY released its second quarter earnings on July 26th. Q2 EPS of $1.64 was in-line with expectations while revenues of $5.77B (-6.5% Y/Y) misses by $10M. The major issue for them was the incredible descent of natural gas prices brought on by the glut created by new fracking technologies. As stated earlier, things are changing. Oil and natural gas prices are on the rise. This bodes well for OXY. The stock has recovered from the drop after earnings. I like the stock here.
EOG Resources, Inc. (EOG)
EOG is trading below its consensus estimates and its 52 week high. The company is trading 11% below its 52 week high and has 14% upside potential based on the analysts' mean target price of $121.94 for the company. EOG was trading Friday for $106.75 up over 11% for the day.
Fundamentally, EOG has several positives. The company has a forward PE of 19.92. EOG pays a dividend with a yield of 0.64%. EOG's expected EPS growth rate for next year is 27.62%. The current net profit margin is 11.61%. EOG's strength comes from its growth in sales and EPS. EOG has quarter over quarter sales and EPS growth rates of 48% and 132% respectively. EOG's PEG ratio is 1.66.
Technically, EOG has been posting higher highs and higher lows since the start of July. The company just pierced the 200 day sma. The stock is in a well-defined uptrend.
EOG was one of the S&P 500's best performers Friday, after its Q2 results easily beat estimates Thursday after the close. Net income rose 34% Y/Y on sharply higher oil output-benefit results. This was attributed to the company's aggressive shift out of natural gas and into heavier liquids production. This is a strong, conservative, well-run company. I have been recommending it for quite some time now. I would wait for the stock to cool down for a few days prior to starting a position. This was a major surprise and the stock may lose steam as short term traders take profits. I expect the stock to pull back and test the 200 day sma. That will be the time to buy.
Kodiak Oil & Gas Corp. (KOG)
KOG is trading below its consensus estimates and its 52 week high. The company is trading 25% below its 52 week high and has 33% upside potential based on the analysts' mean target price of $10.87 for the company. KOG was trading Friday for $8.16 up 8% for the day.
Fundamentally, KOG has several positives. The company has a forward PE of 8.16. KOG's expected EPS growth rate for next five years is 50%. The current net profit margin is 7%. KOG's strength comes from its growth in sales and EPS. According to Finviz.com, KOG has quarter over quarter sales and EPS growth rates of 499% and 115% respectively. KOG's PEG ratio is 1.17.
Technically, KOG has some positives. The stock just breached the 50 day sma. The 200 day sma is on a solid upward trajectory. The next few weeks will be telling for the stock. Can the stock hold above the 50 day sma in the question.
The 8% jump on Friday was due to Kodiak blowing away Q2 earnings expectations of 10 cents a share the previous day by 25 cents a share. Kodiak had 12,696 BOE/day of sales, up 20% quarter over quarter and 385% year over year. 14 operating wells were drilled and completed. DD&A expenses per BOE rose as other expenses declined. Credit facility borrow base increased by $150M to $375M. Estimated proved reserves stand at 70.1M BOE, up 36% from end of 2011.
Kodiak recorded $0.35 cents a share in earnings, nevertheless, $0.25 was due to a non-cash deferred income-tax expense and hedging. Revenue missed by 20% but was offset somewhat by significant cost reductions. So as you can see, looks can be somewhat deceiving. A large portion of the earnings beat was due to hedging and accounting procedures. There is nothing wrong with that other than the fact that it is not organic growth. The question is, can they continue to lower costs and successfully hedge? It is not an easy road to hoe. With the large pop and increased efficiencies rather that true growth accounting for most of the beat, I say KOG is a Hold at this time.
National Oilwell Varco, Inc. (NOV)
NOV is trading well below its consensus estimates and its 52 week high. The company is trading 14% below its 52 week high and has 24% upside potential based on the analysts' mean target price of $93.23 for the company. NOV was trading Friday for $75.36, up almost 4% for the day.
The company has many fundamental positives. NOV has a PEG Ratio of 1.11 and a forward P/E ratio of 11.35. Quarter over quarter EPS and sales growth rates are 47.85% and 36.78% respectively. NOV has a price to book ratio of 1.74.
Technically, NOV is performing well. The stock has been in an uptrend since hitting a low at the end of June. The 200 and 50 day smas are sloping upward. The stock is trading above the 50 day sma and broke through the 200 day sma on the recent earnings beat.
The company has beat earnings estimates three quarters in a row and this one was no different. NOV opened strong on Friday after Q2 results exceed estimates. Producers have been boosting capital expenditures in the past year and are poised to move much of their North America spending to areas yielding more oil and natural gas liquids rather than natural gas. This shift in production has generated increased demand for NOV's products.
The Bottom Line
This year is shaping up to be a repeat of years past. The sell in May and go away phenomenon seems to have taken its toll on the market creating many buying opportunities. Now the summer is approaching an end, I suspect energy stock to continue to rebound. Moreover, if the Middle Eastern Tinderbox actually ignites, these stocks will spike and reach new highs. Now is the time to pick up shares in beaten down energy stocks.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss order to minimize losses even further.