The Middle East is a powder keg about to explode. The energy supply of globe is threatened once again. You can take your pick of the recent strife in the region. Israel, Iran, Syria, Afghanistan, Iraq and now Libya are smoldering tinderboxes on the cusp of catching fire.
Even so, there is no solution in sight regarding the turmoil or the world's diminishing oil supply. Currently, demand is outstripping supply even as global growth stalls and oil and gas gurus invent new ways to extract the black gold. Most of the easy oil and gas resources have been discovered and depleted. Much more expensive endeavors such as hydraulic fracking and deep sea drilling are the primary sources of new discoveries. Even with all the new discoveries, a majority of the supply for the world's energy requirements still emanate from the Middle East. Any disruption in the supply from the Middle East bodes well for U.S. energy players.
Furthermore, several macro events have occurred spurring these stocks even higher. The news China is investing billions in infrastructure to stimulate their economy coupled with the positive steps taken by the ECB and the Fed mulling over implementing QE due to the poor jobs report has sparked the recent rally in oil. More over, the U.S. dollar is sliding which is bullish for dollar denominated assets like oil and gas.
In trading over the last week, shares of the Energy Select Sector SPDR (XLE) were up sharply. The XLE quickly reacted to the news out of the Middle East, China, Europe and the U.S. reversing trend and going positive. Energy Select Sector SPDR shares are currently trading up about 5% on the week and 17% for the quarter. The chart below shows the performance of XLE shares for the past five days.
Finally, these stocks are all bona fide U.S. energy plays with impressive proven and unproven reserves at various points in the production process. They all have catalysts for future growth regardless of the Middle East or QE. The question is: is now the optimal time to buy?
In the following section, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to start a position. The following table depicts summary statistics and Wednesday's performance for the stocks. The following charts are provided by Finviz.com.
Chesapeake Energy Corporation (CHK)
The company is trading 37% below its 52-week high and has 19% potential upside based on the analysts' mean target price of $23.76 for the company. Chesapeake was trading Wednesday for $19.89, down 1% for the day.
Fundamentally, Chesapeake has several positives. Chesapeake has a net profit margin of 19.52%. The company has a forward P/E of 15.07. Chesapeake is trading for 76% of book value. According to Finviz.com, EPS next year is expected to rise by 186.96%. The company pays a dividend with a yield of 1.76% and has a PEG ratio of 0.84.
Technically, Chesapeake has performed well since mid-May. The stock has been in a well-defined uptrend posting higher highs and higher lows. The stock has regained half its loss from the March nosedive. A golden cross event may be fulfilled very soon.
Chesapeake is making progress in executing planned asset sales which should address liquidity concerns. I feel the company may finally have put all the shenanigans behind it. Sometimes a good shakedown is just what a company needs to get their ducks in a row and start firing on all cylinders, so to speak. I like the stock here.
Denbury Resources Inc. (DNR)
The company is trading 23% below its 52-week high and has 39% upside based on the consensus mean target price of $23.00 for the company. Denbury was trading Wednesday at $16.54, down nearly % for the day.
Fundamentally, Denbury has many positives. Denbury has a net profit margin of 26.78%. The company has a PEG ratio of .80 and is trading for 1.26 times book value. The company has a forward P/E of 12.44. EPS for the next five years is expected to rise by 13% and is up nearly 100% this year.
Technically, Denbury looks strong. The stock is testing resistance at the 200 day SMA. If the stock can breech the 200 day SMA and hold above it, this would be extremely bullish.
Denbury is up 18% 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.
Kodiak Oil and Gas Corp. (KOG)
The company is trading 13% below its 52-week high and has 17% upside based on the consensus mean target price of $11.16 for the company. Kodiak was trading Wednesday at $9.51, up nearly 1% for the day.
Fundamentally, Kodiak has many positives. Kodiak has a net profit margin of 36.73%. The company has a PEG ratio of .53 and is trading for 2.54 times book value. The company has a forward P/E of 12.35. EPS for the next five years is expected to rise by 50% is a major positive.
Technically, Kodiak looks good. The stock has recorded higher highs and higher lows since the end of June. None of the indicators are signaling the stock is overbought.
Kodiak blew earning away last quarter; even so, a major portion of the beat was due to hedging and coat savings. Nevertheless, I like what this management team is doing with this company. The stock is a buy.
Cheniere Energy, Inc. (LNG)
The company is trading 13% below its 52-week high and has 29% upside based on the consensus mean target price of $21.20 for the company. Cheniere was trading Wednesday at $16.48, up 1% for the day.
Fundamentally, Cheniere has one bright spot. EPS are up 36% quarter over quarter and many fundamentals are improving incrementally. On the other hand, Cheniere has a net profit margin of -92% which makes this a speculative play.
Technically, the stock looks solid. The stock has been in a well ordered up trend since the start of June. No technical indicators are currently signaling the stock is overbought.
The stock is up 200% from the time I originally recommended it in December 2010 when it was trading for $5.39. The price of natural gas in Asia is much higher than in the U.S. This is an opportunity for major profits. The problem is the natural gas market is for the most part local. It is not as easy to ship natural gas as it is to ship oil. Natural gas must be super-cooled so it liquefies. Cheniere received permission from the US Department of Energy to export LNG produced in North America from its Sabine Pass terminal. The company had already received permission to re-export imported LNG. This is the crux of the argument for buying Cheniere. I like the stock here.
SandRidge Energy, Inc. (SD)
The company is trading 20% below its 52-week high and has 32% upside based on the consensus mean target price of $9.57 for the company. SandRidge was trading Wednesday for $7.42, up slightly for the day.
Fundamentally, SandRidge has several positives. SandRidge is trading 1.25 times book value. SandRidge has a net profit margin of 59.29%. 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. The stock has broken out above the $7 mark and 200 day SMA at $7.20, I expect it to continue to rally.
The Bottom Line
U.S. energy stocks quickly reacted to the news regarding the activities of the central banks around the world. With China, Europe and the U.S. showing the propensity to ease monetary policy and the middle east looking more and more treacherous, these stocks should do quite well over the next five years.
Even though most of these stocks have already had great runs, don't hold that against them. They are moving higher for good reason and the tailwinds just got vastly stronger. Still, take your time building a position. One of the major factors affecting your potential return in a stock is your cost basis.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KOG, LNG, CHK, SD, DNR over the next 72 hours. 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.