The five energy stocks covered in this article have above-average profit margins. SandRidge Energy (SD) has the highest net profit margin at 59.29%, while Chesapeake Energy (CHK) has the lowest at 19.52%. This fact alone carries little weight, but it's a good starting point when looking for buying opportunities.
A company's profitability is conceivably the most important statistic to understand before investing in a stock. Each time you consider starting a position in a stock, you should prudently scrutinize its profitability. The reason profits are so vital to investors is that they inform you about the relative health of a company. A company that is not profitable may not be around for long.
Finally, the current tensions in the Middle East are bringing attention to the mounting energy requirements of global economies. The fact that demand is outstripping supply appears to be blatantly obvious. Most of the easy oil and gas resources have been discovered and depleted. We are now left with onshore 'fracking' and deep sea drilling, which are much more expensive endeavors. Ultimately, these factors will drive the price of oil higher sooner rather than later. Even with all the new discoveries, a majority of the world energy requirements still emanate from the Middle East. Any disruption in the supply from the Middle East bodes well for these stocks.
In the following section, we will perform a review of the fundamental and technical state of each company to determine if these stocks are buys or sells at current levels. The following table depicts summary statistics and Wednesday's performance for the stocks. The following charts are provided by Finviz.com.
Chesapeake Energy Corporation
Chesapeake has a net profit margin of 19.52%. The company is trading 38% below its 52-week high and has 21% potential upside based on the analysts' mean target price of $23.90 for the company. Chesapeake was trading Wednesday for $19.54, up 2% for the day.
Fundamentally, Chesapeake has several positives. The company has a forward P/E of 14.21. Chesapeake is trading for 73% of book value. According to Finviz.com, EPS next year is expected to rise by 193.48%. The company pays a dividend with a yield of 1.82% and has a PEG ratio of 0.81.
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 have trickled out.
Barclays resumed coverage of Chesapeake recently with an Equal Weight rating and $20 target price. The firm believes progress in executing planned asset sales should help address liquidity concerns. I have had Chesapeake in the penalty box for quite some time. I feel the company may finally have distanced itself from the issues. I like the stock here.
Denbury Resources Inc. (DNR)
Denbury has a net profit margin of 26.78%. The company is trading 28% below its 52-week high and has 49% upside based on the consensus mean target price of $23.00 for the company. Denbury was trading Wednesday at $15.41, flat for the day.
Fundamentally, Denbury has many positives. The company has a PEG ratio of .74 and is trading for 1.17 times book value. The company has a forward P/E of 11.50. EPS for the next five years is expected to rise by 13%.
Denbury is up 11% since my initial recommendation to buy the stock on July 12. Denbury is a buy at these levels if you have a long-term time horizon. Oil is going nowhere but up. I like the stock here.
Diamond Offshore Drilling Inc. (DO)
Diamond has a net profit margin of 26.55%. The company is trading 7% below its 52-week high and has 9% upside based on the consensus mean target price of $72.32 for the company. Diamond was trading Wednesday at $66.36, basically flat for the day.
The company has many fundamental positives. Diamond has a forward P/E ratio of 12.42 and an EPS growth rate of 19.96% for next year. DO has a price to book ratio of 2.06 and pays a dividend with a .75% yield.
The stock was in a well-defined uptrend and has recently leveled off. In early August, the stock performed an extremely bullish technical feat referred to as the golden cross, where the 50-day SMA crossed above the 200-day SMA. FBR Capital reiterated its Outperform rating on the stock recently and raised its price target to $85.
The stock has been on fire since July, although lately it seems to be running out of steam. I would like to see the stock test support at the 50-day SMA prior to starting a position. This is about 4% below the current price.
Newfield Exploration Co. (NFX)
Newfield has a net profit margin of 22.52%. The company is trading 36% below its 52-week high and 30% below the consensus mean target price of $42.28 for the company. Newfield was trading Friday for $32.42, down almost 2% for the day.
Fundamentally, Newfield has several positives. The company has a forward P/E of 10.28. Newfield is trading for slightly over book value. EPS next year is expected to rise by 28%. The company has a PEG ratio of .77.
Technically, the stock looks strong. The stock reversed trend in July and has broken above the recent highs. The 50-day SMA has turned upward, which is a sign the stock should continue higher.
The strong dollar combined with talk of a global slowdown has caused oil stocks to drop. This would seem like the perfect catalyst for Iran to rattle its saber once more and cause oil prices to spike higher. I believe we are at an inflection point and oil will begin trending higher. I like the stock here.
SandRidge Energy, Inc.
SandRidge has a net profit margin of 59.29%. The company is trading 26% below its 52-week high and has 43% upside based on the analysts' consensus mean target price of $9.57 for the company. SandRidge was trading Wednesday for $6.79, up 4% for the day.
Fundamentally, SandRidge has several positives. SandRidge is trading slightly over book value. EPS next year is expected to rise by 17%. Quarter-over-quarter sales and EPS growth are up 31% and 265%, respectively.
Technically, the stock has been in a well-defined trading range between $6 and $7 for the past few months. If the stock is able to break out above the $7 mark, I expect it to continue to rally.
SandRidge is one of the biggest players in Kansas' oil and gas industry, as it has scooped up about 1.7 million acres on the Mississippian Lime, an oil and gas play that stretches throughout the central U.S. Things look promising for SandRidge. SandRidge beat earnings estimates last quarter, but were unfairly admonished for an increase in capital expenditures. I would wait for the stock to break above the $7 mark and hold it for a week prior to starting a position.
The Bottom Line
A significantly high net profit margin is a huge positive for a stock. This is a leading indicator that the company is on the right track. A higher stock price should follow. Nevertheless, there are many other factors that will influence a stock's performance. Right now, there is a huge argument as to whether the market will react favorably or not to the ECB's plans for the eurozone's fringe member's debt issues. I believe whatever comes out of it will be reflationary in nature, which is favorable for energy stocks.
Currently, emerging market economies are just beginning to demand their fair share of the global energy pie, while the demand from developed economies is substantially muted due to the recent slowdown in global growth. Even with the sad state of the global economy, we are at $100 a barrel oil. What do you think is going to occur when the economies of the world begin to recover and emerging markets gain viable traction? You can kiss $100 a barrel oil goodbye forever. Based on these facts, the future of companies in the energy industry seems brighter than ever.
Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.