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The Gist

According to a report by Reuters, oil was up Thursday based on several positive economic reports recently. Then again, analysts expect oil prices to ease into year-end due to easing of tensions in the Middle East and North Sea Brent production being brought back online.

Any time I see reports like this I start preparing my shopping list of oil and gas stocks I want to buy that are about to go on sale. I see any drop in oil as a buy on the dip opportunity in energy stocks. The current macroeconomic and geopolitical pictures are transitory in nature. The Middle East never remains calm for long and the economy won't stay down forever.

The energy supply of the globe will never be free of event risk because of the nature of the resource. Approximately 40% of the world's energy supply faces the ultimate choke point, the Strait of Hormuz.

Graphic provided by Maritime Security Review

Anytime Iran wants something or feels pressured it rattle its only saber, which is to shut down the Strait of Hormuz. It's a pretty big saber and as you can see by the graphic they just may be able to pull it off.

Furthermore, several macro events have occurred that could spur these stocks even higher. The news China is investing billions in infrastructure to stimulate its 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 over time. All this bodes well for these energy plays.

Finally, these investments are all bona fide energy companies that pay dividends with yields of 5% on average and are profitable. They all have catalysts for future growth regardless of the Middle East or QE. The question is: is now the optimal time to buy?

The Goods

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.

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BP plc (BP)

BP pays a dividend yielding 4.60%. The stock is trading down 12% from its 52-week high and has 23% upside potential based on the consensus mean price target of $51.08. BP was trading Thursday for $41.68, down slightly for the day.

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The company has many fundamental positives. BP has a forward P/E ratio of 8.02. BP is trading for 1.2 times book value. The company has a net profit margin of 5%. EPS was up over 700% this year according to Fincviz.com.

The stock has been in a well-defined uptrend since the start of June. The stock has pulled back to approximately 1% below the 200-day sma and is at the bottom of the current uptrend channel. I see the recent pullback as a buying opportunity. I like the stock right here.

ConocoPhillips (COP)

COP pays a dividend yielding 4.72%. The stock is trading down 3% from its 52-week high and has 10% upside potential based on the consensus mean price target of $62.91. COP was trading Thursday for $57.94, up almost 2% for the day.

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The company has many fundamental positives. COP has a forward P/E ratio of 9.8/7. COP is trading for 1.5 times book value. The company has a net profit margin of 10.55%. ConocoPhillips plans to achieve growth by focusing on high margin production. The company plans to reinvest cash flows to achieve organic reserves replacement of over 100%.

The stock has been in a well-defined uptrend since the start of June. The stock has pulled back to approximately 1% above the 50-day sma and is near the bottom of the current uptrend channel. This is an ideal time to start a position. COP just reported Q3 EPS of $1.44 beating the street by $0.31. I see the recent pullback as a buying opportunity.

Chevron Corporation (CVX)

Chevron pays a dividend yielding 3.28%. The stock is trading down 7% from its 52-week high and has 12% upside potential based on the consensus mean price target of $124.15. Chevron was trading Thursday for $110.67, up nearly 1% for the day.

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The company has many fundamental positives. Chevron has a forward P/E ratio of 8.74. Chevron is trading for 1.66 times book value. The company has a net profit margin of 10.79%. Chevron's EPS is up 42% this year. The ROE is 21.68%.

The stock has been in a well-defined uptrend since the start of June. The stock has pulled back to approximately 4% above the 200-day sma and has broken the uptrend. I would wait a bit prior to starting a position in this stock. I think it will test the 200-day before the year is out. Chevron is a solid performing low beta stock. I like it long term.

Enbridge Energy Partners LP (EEP)

Enbridge, a master limited partnership [MLP], pays a dividend yielding 7.25%. The MLP is trading down 7% from its 52-week high and has 10% upside potential based on the consensus mean price target of $32.87. Enbridge was trading Thursday for $29.87, down slightly for the day.

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The company has many fundamental positives. Enbridge has a forward P/E ratio of 22. Enbridge is trading for 2 times book value. The company has a net profit margin of 8%. Enbridge's EPS is up 282% this year and expected to be up 40% next year.

The MLP has been in a well-defined uptrend since the start of June. The stock has pulled back to approximately 1% above the 200-day sma which is right in the middle of the uptrend channel. I like it right here. With more and more new production coming online in the U.S. Embridge should do very well over the long haul.

Linn Energy, LLC (LINE)

Linn, a master limited partnership [MLP], pays a dividend yielding 7.07%. The MLP is trading down 1% from its 52 week high and has 7% upside potential based on the consensus mean price target of $44.70. Linn was trading Thursday for $41.98, up over 2% for the day.

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The company has many fundamental positives. Linn has a forward P/E ratio of 25. Linn is trading for 2 times book value. The company has a net profit margin of 36.73%. Linn's EPS is up 400% this year and expected to be up 30% next year.

The MLP has been in a well-defined uptrend since the start of June. The stock has pulled back to right in the middle of the uptrend channel. I like it right here. Linn is a solid MLP with a payout ratio of only 60%. The stock is a buy here.

The Bottom Line

The Persian Gulf is a smoldering tinderbox on the cusp of igniting. There is no good solution regarding the vulnerability of Strait of Hormuz, which a major portion of the world's oil supply must pass through. Moreover, demand for energy is outstripping supply even as global growth slows and experts develop new methods to extract oil and gas. Even with all the new discoveries, a majority of the supply for the world's energy requirements still emanate from the Middle East. The ever-present risk that Middle East oil supplies will be shut off coupled with the prospects of an economic recovery underpins the value of these energy plays long term.

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.

Due to the fact recent news was positive regarding the economic picture and Middle East tensions, I suggest layering into these names as there may be a significant buying opportunity going into year end.

Source: 5 Energy Buys Yielding Over 5% On Average With Notable Upside

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.