I recently wrote an article regarding the current state of affairs within the energy sector for the fourth quarter. In it, I chose five energy stocks I felt would do well in the coming years. As usual, I received many emails and messages that there are a lot more than five bargains to be had in the sector. In the last article I focused on high yield blue chip energy plays. In this article the distinguishing factor for the companies selected, amongst many others, was strong 2013 EPS growth. When determining whether or not to buy a stock EPS growth should be one of your major concerns. The following is my analysis of the global oil and gas market and the five stocks.
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 the country rattles 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 have some strong fundamentals and are expected to grow EPS next year by 70% on average. Chesapeake (NYSE:CHK) has the highest projected EPS at over 200% while SandRidge Energy (NYSE:SD) has the least with 27.27%. 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 Friday's performance for the stocks. The following charts are provided by Finviz.com.
Chesapeake Energy Corporation
Chesapeake's projected EPS growth for 2013 is 202.17%. The company is trading 32% below its 52-week high and has 19% potential upside based on the analysts' mean target price of $23.92 for the company. Chesapeake was trading Friday for $20.09, down almost 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 14.55. Chesapeake is trading for 77% of book value. The company pays a dividend with a yield of 1.73% and has a PEG ratio of 0.92.
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. The stock has pulled back to major support at the 200-day sma. This is an excellent buying opportunity.
All these stocks are down due to the recent weakness it oil and gas. Chesapeake is down significantly more due to past alleged shenanigans by the CEO. I see this as an excellent entry point.
Kinder Morgan, Inc. (KMI)
Kinder's projected EPS growth for 2013 is 56.32%. The company is now trading 12% below its 52-week high and has 15% upside potential based on the analysts' mean target price of $39.92 for the company. Kinder was trading Friday for $34.61, down over 1% for the day.
Fundamentally, Kinder has several positives. Kinder pays a dividend with a yield of 4.11%. The current net profit margin is 10.83%. Kinder's PEG ratio is 1.80. Kinder recently reported earnings. Kinder's profit jumped 78% on strength across all business segments. Kinder expects to declare dividends of at least $1.40/share for 2012, up approximately 17% year over year.
Technically, Kinder is in an uptrend and poised to break out one way or the other. The stock has been in an uptrend since late June. The stock is hugging the 200-day sma at the bottom of the uptrend channel.
Kinder pays a high yield dividend and has strong oil patch pipeline infrastructure growth prospects with all the new production coming online. The stock is a buy here.
QEP Resources, Inc. (QEP)
QEP's projected EPS growth for 2013 is 47.68%. The company is now trading 18% below its 52-week high and has 26% upside potential based on the analysts' mean target price of $39.77 for the company. QEP was trading Friday for $31.41, down nearly 1% for the day.
Fundamentally, QEP has several positives. The company has a forward P/E of 14.19. QEP pays a dividend with a yield of 0.25%. The current net profit margin is 9.14%. QEP's PEG ratio is 1.50.
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. The stock is a buy here.
SandRidge Energy, Inc.
SandRidge's projected EPS growth for 2013 is 27.27%. The company is trading 31% below its 52-week high and has 54% upside based on the consensus mean target price of $9.66 for the company. SandRidge was trading Friday for $6.26, down over 2% for the day.
Fundamentally, SandRidge has several positives. SandRidge is trading 1.11 times book value. SandRidge has a net profit margin of 59.29%. Quarter-over-quarter sales and EPS growth are up 31% and 265%, respectively. ROE is 35%.
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 has taken a nosedive in the second half of October and has broken through all support levels. Look to pick the stock up at the $6 mark which has marked the bottom twice over the last year. The stock is a buy, but you may get a chance to get it a little lower in the coming weeks.
Southwestern Energy Co. (SWN)
Southwestern's projected EPS growth for 2013 is 28.57%. The company is trading 24% below its 52-week high and 12% below the consensus mean target price of $38.12 for the company. Southwestern was trading Friday for $33.92, basically flat for the day.
Fundamentally, Southwestern has some positives. The company has a forward P/E of 21. EPS for the past five years has been up 31%.
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. Now the stock has pulled back to support just above the 50-day sma.
Southwestern is bringing enormous amounts of production online in the Marcellus shale, while Fayetteville production has remained strong and stable. This should provide substantial growth potential. 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 the 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 Middle East tensions, I suggest layering into these names as there may be a significant buying opportunity going into year end.
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.