Why These 4 Oil And Gas Stocks Are Ready To Move Higher

by: Josh Hutheson

Shares of companies in the oil and gas space have been tracking the market over the past year as prices for natural resources have been relatively more stable compared to the previous five year time frame. That stability has sent the excitement-seeking crowd into other sectors in the marketplace and created an outflow of investment dollars from the oil and gas sector into other sectors in the marketplace. In turn, that has created overlooked and undervalued opportunities in the space and analysts agree.

Barron's reported on Wednesday that a Citigroup strategist said the exploration and production subsector of the energy sector looks "strong" due to favorable valuation factors. Also on Wednesday, in a report Morningstar said that the energy sector remains "materially" undervalued. Here are the four stocks that caught my eye:

Apache (NYSE:APA), an independent energy company, explores for, develops, and produces natural gas, crude oil, and natural gas liquids. It holds interests in an asset base of 12.3 million gross acres located in Central United States, the Permian Basin, and the Gulf Coast onshore and offshore areas of the United States; in an area of 7 million gross acres in the provinces of British Columbia, Alberta, and Saskatchewan; and in an area of 9.7 million gross acres located in Western Desert, Egypt. The company also has interests elsewhere. In totally, as of December 31, 2012, it had total estimated proved reserves of 1,441 million barrels of crude oil, condensate, and natural gas liquids; and 8.5 trillion cubic feet of natural gas.

The valuation on Apache is on the bargain end of things, especially considering its size with a market cap of close to $30 billion. Street analysts have placed a consensus target of over $100 a share on the stock or upside of more than 30% from current prices. Morningstar commented in its report that there is potential for "meaningful" upside in Apache. On a P/E basis, the stock also appears undervalued. The shares are currently trading at a forward P/E multiple, based on 2013 earnings estimates, of just 8, a multiple typically reserved for companies with little to no growth opportunities. Apache is expected to post revenue growth of 4% this year and 8% next year even in this low-priced natural gas environment. Anadarko Petroleum (NYSE:APC) is typically mentioned as the close comparison for Apache and APC is trading at a forward P/E multiple, based on 2013 forecasts, of 22.

Octagon 88 Resources (OTCPK:OCTX) is a Nevada corporation located in Switzerland with significant oil assets in the Manning Area, in Peace River, Alberta, Canada. In 2012 and in 2013, Octagon 88 Resources acquired substantial light and conventional heavy oil assets in Northern Alberta. The acquired projects have been substantially de-risked which lead the company to emerge as a development-stage oil and gas company as of January 22, 2013. The company's intention is to grow shareholder value through mergers and acquisitions opportunities available to the company.

In an analyst report dated February 8, an analyst wrote that Octagon 88 Resources has built an "impressive" portfolio of conventional and unconventional leaseholds. Projects include conventional light sweet oil developments with quick cash netbacks and unconventional long term heavy oil assets with blue sky potential of several billions of barrels exploration and developments. The analyst gave a risk-adjusted target per share of $12.18 with additional significant upside potential when the planned development program is successfully executed. The stock currently trades in the $6 range.

The most recent news announcement for the company came Wednesday afternoon when Octagon provided the first analysis of the cores successfully taken from Elkton Erosional edge well. The porosity throughout the full 20 meters of pay zone has shown to be 30% rather than the earlier announced 18%. The news is a welcome development as it dynamically increases the amount oil contained in the sands. Additionally the cores are fluoresced orange throughout the complete pay zone indicating again to be lighter heavy oil to produce with primary production methods.

Magnum Hunter Resources (MHR) and its subsidiaries are a Houston, Texas, based independent exploration and production company engaged in the acquisition, development and production of crude oil, natural gas and natural gas liquids, primarily in the states of West Virginia, Kentucky, Ohio, Texas and North Dakota and Saskatchewan, Canada. The company is presently active in five of the most prolific unconventional shale resource plays in North America, namely the Marcellus Shale, Utica Shale, Eagle Ford Shale, Pearsall Shale and Williston Basin/Bakken Shale.

Investors are optimistic on the stock as it is focused on the three best shale plays and has experienced explosive growth in its reserves. The company reported a 63% increase in the quantity of the company's estimated total proved oil and gas reserves at December 31, 2012 as compared to December 31, 2011. The present value of estimated future cash flows, before income taxes, of the company's estimated total proved reserves as of year-end 2012, discounted at 10% ("PV-10"), also increased 59% to $981.2 million as compared to one year ago. Analysts also have spoken on Magnum Hunter with a price target of $6.50 on the shares versus a current price just south of $4 a share.

The stock could experience some volatility in April as a more comprehensive state report will publish new data from Ohio's oil and gas wells that will offer the most insight yet about whether the Utica Shale is the next big thing or a potentially fizzling bust for companies operating there.

W&T Offshore (NYSE:WTI) is an independent oil and natural gas producer with operations offshore in the Gulf of Mexico and onshore in both the Permian Basin of West Texas and in East Texas. WTI has grown through acquisitions, exploration and development and currently hold working interests in approximately 72 offshore fields in federal and state waters (69 producing and three fields capable of producing). W&T currently has under lease over 1.4 million gross acres including over 710,000 gross acres on the Gulf of Mexico Shelf, over 480,000 gross acres in the deepwater and over 221,000 gross acres onshore in Texas. A substantial majority of its daily production is derived from wells it operates offshore.

The big attraction for WTI is the fact that it has insider ownership of nearly 54% compared to insider ownership at peers of just 7%. The company places a major focus on returning cash to shareholders and sports a quarterly dividend of $0.08 per share for a yield of 2.2%. The quarterly dividend is not all the company kicks off to shareholders though as WTI typically pays a special dividend and has paid one in five of the last six years, with two special dividends paid in 2012. Including the special dividends, the dividend yield was 6.9% for 2012. That focus on shareholders is paying off as the company is well-liked by analysts with a consensus price target of about $21 on the shares versus a current price in the mid-$13s.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.