The Middle East is a powder keg about to explode threatening the energy supply of the globe once again. You can take your pick of the recent strife in the region. Israel & Iran, Syria & Turkey, Afghanistan or raq are all smoldering tinderboxes on the verge of catching fire. Even so, there is no resolution for the tumult.
Even with all the new discoveries, a majority of the supply for the world's energy requirements still emanate from the Middle East. I posit if you see any disruption in the supply from the Middle East U.S. energy stocks will soar on the news.
Moreover, several macro-economic and geopolitical developments have occurred which bode well for energy stocks. Central banks around the globe are taking steps to put a floor under risk assets which the use of quantitative easing, monetary policy and infrastructure stimulus packages.
China is investing billions in infrastructure to stimulate their economy. The ECB, Fed and the central bank of Japan have all initiated QE programs. Eventually, these stocks will benefit from these actions.
Finally, these stocks are all bona fide U.S. energy plays that all have catalysts for future growth regardless of the Middle East or QE. The question is: is now the optimal time to buy? I love this noteworthy quote from Wayne Gretzky:
A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.
This quote exactly reflects the counterintuitive thought process you must have as an investor to make money in the market. You must buy low and sell high to make money, and usually the only time to but low is when the stock or sector is out of favor. I say that time is now for these stocks.
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 Thursday's performance for the stocks. The following charts are provided by Finviz.com.
Chesapeake Energy Corporation (CHK)
The company is trading 34% below its 52-week high and has 23% potential upside based on the analysts' mean target price of $23.98 for the company. Chesapeake was trading Thursday for $19.47, up over 2% 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 14.75. Chesapeake is trading for 74% of book value. According to Finviz.com, EPS next year is expected to rise by 193%. The company pays a dividend with a yield of 1.80% and has a PEG ratio of 0.82.
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. Nonetheless, the stock recently broke below the uptrend line but held at the 50-day SMA which is a positive.
All these stocks are down due to the recent weakness it oil& gas. Chesapeake is down significantly due to the past shenanigans by the CEO. I see this as an excellent entry point.
Denbury Resources Inc. (DNR)
The company is trading 23% below its 52-week high and has 41% upside based on the consensus mean target price of $23.18 for the company. Denbury was trading Thursday at $16.40, up over 2% for the day.
Fundamentally, Denbury has many positives. Denbury has a net profit margin of 26.78%. The company has a PEG ratio of .61 and is trading for 1.25 times book value. The company has a forward P/E of 13.02. EPS for the next five years is expected to rise by 17% and is up nearly 100% this year.
Technically, Denbury looks good. The stock recently blew through resistance at the 200 day SMA and has pulled back. The stock is resting just above resistance on the uptrend channel. The stock is in a descending triangle formation which means a breakout likely in the near future. I see it breaking out to the upside.
Denbury is up 19% since my initial recommendation to buy the stock on July 12. Denbury is a buy at these levels. I like the stock here.
Halliburton Company (HAL)
Halliburton is trading up 19% from the day of my initial recommendation in June when the stock was trading for $28.57. The company is trading 15% below its 52-week high and has 28% upside potential based on the consensus mean target price of $43.54 for the company. Halliburton was trading Thursday for $33.97, up almost 3% for the day.
Fundamentally, Halliburton has some positives. The company has a forward P/E of 9.90. Halliburton pays a dividend with a yield of over 1%. Halliburton's expected EPS growth rate for next five years is 18%. The current net profit margin is 11.34%. Halliburton's PEG ratio is .55.
Technically, Halliburton has been on fire since June. The company pierced the 200-day SMA at the beginning of August and retested it once again at the beginning of September and has pulled back to just above the 200-day SMA now.
The RSI was indicating the stock was overbought in my last update, now is the time to start a position. Halliburton's profit streams are stable. The company is one of the oldest and most trusted oil service companies in the business.
QEP Resources, Inc. (QEP)
QEP is trading up 19% from the day of my initial recommendation in May when the stock was trading for $26.88. The company is now trading 16% below its 52-week high and has 22% upside potential based on the analysts' mean target price of $39.07 for the company. QEP was trading Thursday for $32.08, up nearly 3% for the day.
Fundamentally, QEP has several positives. The company has a forward P/E of 14.52. QEP pays a dividend with a yield of 0.25%. QEP's expected EPS growth rate for next year is 47.33%. The current net profit margin is 9.14%. QEP's PEG ratio is 1.52.
Technically, QEP looks good. The stock has been in an uptrend since late June. In my last update I suggested waiting for a pullback to buy the stock. The pullback has occurred. Additionally, the stock has just achieved the coveted golden cross which is when the 50-day SMA crosses above the 200-day SMA. This is extremely bullish for the stock.
QEP should benefit significantly from its shift away from natural gas and to oil. I posit the increased margin has not been priced in.
Valero Energy Corporation (VLO)
Valero is up 57.92% YTD and 33.59% for the past quarter. Currently, the company is trading 5% below its 52 week high and has 18% potential upside based on the analysts' mean target price of $38.53 for the company. Valero closed Thursday at $32.61, up over 3% for the day.
Fundamentally, Valero has some positives. The company trades for 18 times free cash flow. Valero has a forward P/E of 6.91. The company pays a dividend with a yield of 2.15%. The company trades for 1.08 times book value and EPS is up 126% this year.
Technically, the stock looks great. The stock has been in an orderly uptrend since June. The coveted golden cross was achieved at the beginning of August where the 50 day SMA crosses above the 200 day SMA. This is one of my key buy indicators.
Valero has several positive catalysts for future growth and has performed very well since the start of the year. The company should see significant upside as the infrastructure build out for the U.S. unconventional oil plays continues to mature.
The Bottom Line
U.S. energy stocks reacted to the news regarding the activities of the central banks around the world, yet have pulled back recently. With China, Europe and the U.S. showing the propensity to ease monetary policy and the Middle East looking like a tinderbox ready to ignite, I see the recent pullback as a buying opportunity.
Emerging markets are just beginning to demand their fair share of the world's energy reserves. Moreover, even with the current global economy supposedly wilting, we are still at nearly $100 a barrel oil. What do you think is going to transpire when the developed economies of the world fully recover and emerging markets gain viable traction? Based on these facts, the future of companies in the energy industry seems brighter than ever.