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Two Energy Stocks Poised For Success: El Paso & Schlumberger

|Includes:El Paso Pipeline Partners, L.P. (EPB), SLB

Originally Posted on June 25th, 2012

Energy stocks look to be lucrative investments heading into the summer months. Two energy stocks I particularly like are Schlumberger (NYSE: SLB) and El Paso (NYSE: EP). Below are my thoughts on the two:

Schlumberger (NYSE: SLB) is an oilfield-services company that sells project management, technology, and information services to oil and gas companies across the globe. This company has been soaring as of late and its business as a whole is gaining momentum heading into the summer months. The past few quarters, SLB has beat analysts earnings expectations. Adding to this the stock is trading at a great value compared to historical averages. Analysts are projecting this stock to rise over the course of the next 12-months. SLB receives a "Buy" recommendation from 86% of all research analysts, a huge upside going forward.

SLB is finally moving in the right direction, last February they acquired Smith, another energy services company in an $11 billion dollar stock deal. SLB is now finally using these assets to the best of their ability increasing revenues all across the board. Smith helped contribute $275 million in income last quarter.Higher costs have dropped SLB's net profit margin however this is nothing to worry in the long-term as business is so good SLB continues to dominate the sector. Schlumberger's stock sells for a forward earnings multiple of 22, a 9% discount to the energy equipment and services industry average. Schlumberger's stock sells for a forward earnings multiple of 22, a 9% discount to the energy equipment and services industry average. Some analysts expect SLB to kill it in the next year; Morgan Stanley has a bullish-scenario target of $180 for Schlumberger, a total yield of 110%. More realistically though I expect Schlumberger's stock to advance $125 a total yield of 48%.

El Paso (NYSE: EP) is one of the top natural gas transmission, exploration, and production companies. EP has a very impressive book of business resulting in them receiving a "buy" rating from an impressive 80% of analysts. El Paso has significant interests in the 42,000 mile North American natural gas pipeline system, which will increase in importance in coming years as the U.S. segues from foreign-produced oil to domestically-abundant natural gas. Over the past several years, EP's net income has grown statistically 7.2% a year. I think EP is a very attractive investment due to its pricing power compared to companies who need to transport/store natural gas, which hurts profit margins. Over the past year, gross margin and operating margin both rose 10%+.

Adding to this, EP has a very stable pipeline business and their exploration unit has interested many investors as they continue to find new territories to explore. The explorative part of El Paso makes the stock attractive long-term due to its very lucrative prospects backed by stable cash flow. EP sells at a trailing earnings multiple of 11, a forward earnings multiple of 13, a book value multiple of 2.2, a sales multiple of 2.1 and a cash flow multiple of 5.4. All these are huge discounts compared to industry peers. I forecast EP to rise 30% to $42 a share within the next 12-months.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLB, EPB over the next 72 hours.

Stocks: EPB, SLB