I wrote a couple of articles covering five North American oil and gas stocks I felt had the potential to increase shareholder wealth significantly in 2012 in December of last year. Four of the five selected companies have been great opportunities, up nearly 21% on average since my initial recommendation while SandRidge Energy, Inc. (SD) is down 12.50%. The following is the gist of my thesis as to why these companies still have room to run and stand to profit in the near future followed by a detailed review of each company's fundamental and technical status.
The Middle East is a powder keg about to explode. The energy supply of the globe is threatened once again. You can take your pick of the recent strife in the region. Israel, Iran, Syria, Afghanistan, Iraq and Libya are smoldering tinderboxes on the cusp of exploding. Even so, there is no solution in sight regarding the vulnerability of the majority of the world's oil supply.
Demand for energy is outstripping supply even as global growth allegedly stalls and energy gurus invent new ways to extract the black gold. You see, 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 the energy companies covered in this article.
Furthermore, several macro events have occurred that could spur 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 implementing QE will spark a rally in dollar denominated commodities such as oil and gas. Moreover, the dollar is sliding, which is bullish for dollar-denominated assets as well. All this bodes well for these North American energy plays.
Finally, these stocks are all bona fide North American 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?
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 Monday's performance for the stocks. The following charts are provided by Finviz.com.
Southwestern Energy Co. (SWN)
Southwestern is up 13.31% since my recommendation in December of 2011 to buy the stock. The company is trading 18% below its 52-week high and 5% below the consensus mean target price of $37.96 for the company. Southwestern was trading Monday for $36.19, up slightly for the day.
Fundamentally, Southwestern has some positives. The company has a forward P/E of 22. EPS is expected to grow by 28% next year. Southwestern is bringing enormous amounts of production online in the Marcellus shale, while Fayetteville production has remained strong and stable.
Technically, the stock looks great. The stock recently achieved the coveted golden cross. The golden cross is when the 50-day sma crosses above the 200-day sma. This is viewed as extremely bullish. It means the number of buyers is currently outgrowing sellers.
In my last update on the stock, I stated to wait for a more favorable point to get into this stock. I posit the time is now to start a position based on the recent run in natural gas prices.
National Oilwell Varco, Inc. (NOV)
NOV is up 16.18% since my recommendation in December of 2011 to buy the stock. NOV is trading 13% below its 52-week high and has 23% upside potential based on the analysts' mean target price of $96.59 for the company. NOV was trading Monday for $78.62, up almost 1% for the day.
The company has many fundamental positives. NOV has a PEG Ratio of 1.05 and a forward P/E ratio of 11.38. Quarter over quarter EPS and sales growth rates are 35% and 25% respectively. NOV has a price to book ratio of 1.78.
Technically, NOV was performing well until it broke trend in mid-September. The stock has been in a downtrend since that point and is now trading slightly below the 50-day MA which should offer significant support.
The company has beat earnings estimates three quarters in a row and this one will be no different. NOV has been boosting capital expenditures in the past year and is poised to move much of its 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 stock is a buy here.
SandRidge Energy, Inc.
SandRidge is down 12.50% since my recommendation in December of 2011 to buy the stock. The company is trading 21% below its 52-week high and has 35% upside based on the consensus mean target price of $9.61 for the company. SandRidge was trading Monday for $7.14, up slightly for the day.
Fundamentally, SandRidge has several positives. SandRidge is trading 1.23 times book value. SandRidge has a net profit margin of 59.29%. EPS next year is expected to rise by 27%. 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 broke out above the $7 mark and 200 day SMA at $7.20, but pulled back recently due to a transitory weakness in the oil markets.
Tom Ward is turning this company into a profit machine. SandRidge has made the investments and over the next three years, it should capitalize on them greatly as cash flow increases. The stock is a buy here.
Suncor Energy Inc. (SU)
Suncor is up 15.90% since my recommendation in December of 2011 to buy the stock. The company is trading 18% below its 52-week high and has 5% upside based on the consensus mean target price of $41.96 for the company. Suncor was trading Monday for $33.02, down over 1% for the day.
Fundamentally, Suncor has several positives. Suncor is trading 1.27 times book value. Suncor has a net profit margin of 11.02% and a forward P/E of 10.48. The stock trades for 15 times free cash flow.
Technically, the stock has been in a well-defined uptrend and has achieved the coveted golden cross recently. The stock is trading just above the 50-day sma. The technical signs are bullish. The stock is a buy.
Williams Companies, Inc. (WMB)
Williams is up 37.20% since my recommendation in December of 2011 to buy the stock. The company is trading 5% below its 52-week high and has 1% upside based on the consensus mean target price of $36.08 for the company. Williams was trading Monday for $35.85, up over 2% for the day.
Fundamentally, Williams has some positives but looks richly valued. Williams is trading nearly 8 times book value. Williams has a net profit margin of 12.64% and a forward P/E of 25.61. The stock trades with a PEG ratio of over 2 which is considered overvalued.
Technically, the stock has been in a well-defined uptrend and has pulled back to the 20-day sma recently. The stock is trading 7% above the 50-day sma. The technical signs are bullish, but I would avoid this stock based on the fundamentals. This stock is up the most since my recommendation to buy; consequently it has become overvalued at current levels. I would take profits at this time or avoid the stock if not in it yet.
The Bottom Line
I posit these energy equities will continue upward from their current share prices based on macroeconomic, sector and company specific catalysts. These stocks have great stories, good fundamentals and positive facilitators for future growth. However, many are trading at significant discounts due to incessant negative macroeconomic headlines and a lack of confidence from Main Street based on the ever-present deleterious employment picture.
Although recent news regarding the U.S. unemployment picture and housing has been positive, I suggest layering into these names as there may be a significant buying opportunity produced by the bureaucrats as they work their way through the so called fiscal cliff.
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, and no plans to initiate any positions within the next 72 hours.
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.