One of the sharpest corrections ever in energy stocks, which has dragged shares of most large energy companies to below 10x next year's earnings, is a seldom-seen opportunity to make 25% or more on your money over the coming year, Barron's Andy Bary says.
Energy analyst David Kistler notes major independents like Anadarko (NYSE:APC), Devon Energy (NYSE:DVN) and XTO Energy (XTO) are trading at little more than half their net asset values, making their risk/reward excellent. Such firms are heavily focused on North American E&P, which shields them from much of the geo-political turmoil multinational peers have suffered in Venezuela, Russia and Nigeria. APC and DVN are also prime takeover targets at current prices.
Investors worry the oil majors (ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), BP (NYSE:BP), ConocoPhillips (NYSE:COP)) are being hurt by largely undisclosed production-sharing accords with nations in which they drill. Given high oil prices, the agreements - which limit producers' returns after recouping initial investments - are quickly putting the host countries in control. Barron's notes that for Exxon, only 20% of its output is subject to such accords, and thinks its problems and those of its peers have already been more than priced into its shares.
Lehman's Paul Cheng likes Chevron, which trades for just 6.6x 2008 earnings. He sees CVX boosting output by 4% in 2009 and 2010.
Suncor Energy (NYSE:SU), the most prominent oil-sands play, trades for just 8.5x 2009 earnings. Bear in mind it consistently trades at a premium due to its enormous reserves that could last 100 years vs. 20-30 for other oil majors. XTO Energy (XTO) is another company whose historic premium has vaporized.
"Given such valuations, it seems tough to go wrong now with XTO or almost any major energy stock, even if energy prices fall a little further."