Top 10 Energy Stocks You Should Own - Part I

Includes: HAL, REXX, RRC, UPLC
by: James Hartje

Across the board, 2013 has already been a strong year for oil and natural gas companies and we're only five months into the year. What we have seen is that many of these oil and natural gas stocks have already made double-digit gains on the year alone. This is one of the main reasons we have decided to focus on the right energy stocks to invest in.

When it comes to energy stocks, all we have been seeing is huge gains across the board. That's why we believe this is a great time to invest in the energy sector. More importantly, we believe American-based energy companies are set to produce some of the biggest returns over the next few years. There is a lot of speculation that we are entering an American energy boom that will propel these stocks higher.

Going forward, we are going to be focusing the majority of our articles on the energy sector and the best ways to invest within that sector. This article is the first part of a two-part series in which we will be offering up our 10 favorite energy stocks. Below are our first five picks.

1. Halliburton (NYSE:HAL), Projections: +57.2%

A little over 19 months ago, we first recommended investors buy Halliburton because we saw it as a strong long-term investment. During those long 18 months, we unfortunately have nothing to show for it as shares are now trading at the same levels they were at when we initially invested. Our timing for HAL was off -- we invested at the wrong moment as shares fell over 40% in the first nine months due to falling oil prices and overall weakness in the global economy. Since then, however, HAL has recovered quite nicely. The stock is up 27% over the past six months and up 40% over the course of the past year, as share prices are now back to where they were when we first initially invested. Fundamentally, we still like Halliburton for all the same reasons (click here to read our original article on HAL and find out more details).

Going forward, HAL's outlook is very bullish with 91% of analysts covering HAL issuing a buy rating or higher. Overall there are 32 analysts currently covering HAL, and all but three think it's a great buy opportunity. If that doesn't make you feel comfortable, then maybe this will: HAL is represented in the equity portfolio of Soros Fund Management, which holds a $34 million stake.

2013 has been a good year for HAL investors for several reasons. First, HAL's share price has appreciated 18% year to date. Second, in February Halliburton announced a 39% increase in its quarterly dividend to $0.125 per share. Third, in its most recent quarter (Q1 2013), the oil and gas E&P play reported a record $7.0 billion. Halliburton's management has stated that it's focused on improving North American margins in the intermediate term, and we have no reason to doubt it won't accomplish this goal. Historically, it has always been one of the most efficient management teams worldwide. If you're looking from George Soros' point of view, he might see HAL as the best way to play America's energy boom.

Halliburton's strength in the tight oil and gas space is underrated. Trading at 10.7 times forward earnings, HAL is cheap especially compared to its peers. Going forward we are very optimistic about HAL's long-term outlook and believe that the company will continue to outperform its competition. We believe it will position itself as the leader of the American energy boom. As a result, we believe shares of HAL will be trading at $65 12 months from now, which -- including the annual dividend of 1.20% -- works out to be a total net yield of 57.2%.

2. Rex Energy (NASDAQ:REXX), Projections: +21%

Rex Energy has been a favorite of ours, along with being one of our top-performing stock picks for both 2012 and 2013. We first recommended REXX as a strong buy opportunity around a year ago. In that short time period, shares have soared over 78%. This probably led many investors to sell off their entire position, thinking that the stock couldn't rise any higher, without actually reanalyzing the company's past and future performance, long-term projections, and overall outlook to see if there still is more potential there.

We did, in fact, take the time to reanalyze REXX and what we found was that while it had been a great year, there was nothing to suggest that this run would stop or that REXX would lose value going forward. In fact, many key indicators led us to continue to be bullish on REXX. We did, however, sell half of our position and recommended our readers to do the same. This would protect our portfolio in case of a market correction, allowing us to play with house money rather than still having all our original starting capital at risk. To find out why we like REXX going forward, click here. We expect REXX to continue to outperform its peers and have placed a 12-month price target of $20 per share on the company -- a total net yield of 21%.

3. Range Resources (NYSE:RRC), Projections: +27%

Range Resources' stock price has climbed steadily throughout the past year as shares are up 21% year to date and up 38% over the course of the past 12 months. Going forward, there is nothing to make us doubt that RRC won't continue to rise higher. The company foresees production to grow between 20% and 25% over the course of the next few years. RRC's total resource potential is estimated to be anywhere between 50 trillion and 70 trillion cubic feet equivalent of natural gas. Being a low-cost producer, RRC should yield exceptional profits from these upbeat production numbers.

We also believe that RRC's new strategy and focus on per-share growth -- instead of focusing on growth at all costs - will be a big driving force for it going forward. We believe it will be a key factor in sending share prices even higher. With increased production and exports expected to continue to grow, there is little to suggest that Range Resource's stock won't stop continuing to steadily rise higher. In fact, we think RRC will be a big winner going forward as we expect shares to hit $95 over the course of the next 12 months, a total yield of +27%.

4. Southwestern Energy (NYSE:SWN), Projections: +40%

Southwestern Energy has made some key recent capital investments that we believe will only further strengthen the company's long-term outlook, as well as send share prices significantly higher. SWN recently doubled down on its Marcellus acreage, purchasing 162,000 acres from Chesapeake Energy (NYSE:CHK) for $93 million. Being the discoverer of the Marcellus play, SWN made the most of its first-mover advantage as it has continued to improve its operations within the acreage. This strategic investment has greatly strengthened SWN's overall outlook going forward, leading to an increase in its overall projections across the board.

Even as SWN expands, the bulk of its assets are still in the Fayetteville Shale. SWN's strategic capital investments have been crucial, providing the company with a low-cost structure that will help SWN profit even if gas prices were to fall or weaken. Shares of SWN rose 37% over the course of the past year. To many investors that is a great return, but when you dig deeper and see the long-term potential you realize that SWN is just getting started. The combination of both SWN's smart and strategic investments along with its luck in what it discovered has led to increased optimism on SWN's overall long-term outlook. These findings have also led to many analysts on Wall Street upping their projections, creating an additional 30% upside to SWN from current levels.

The biggest news of all might be that SWN's recent acquisitions has led to it becoming a new position in the hedge fund managed by George Soros, the fund disclosed a $16.7 million position in Southwestern Energy. This is following a strong first quarter in which SWN posted an annual increase in production of 11%, along with earnings of $0.36 per share vs. $0.30 EPS just a year ago, representing solid growth. Add in the recent developments, acquisitions, and investments and SWN has become a much more interesting play and one that holds a lot more potential and value going forward. We project shares of SWN to be trading at $52 12 months from now, a total net yield of 40%.

5. Ultra Petroleum Corp. (UPL), Projections: +63%

Just like RRC, Ultra Petroleum is another low-cost producer utilizing a new strategy to increase overall future production. UPL is now using its cost position to focus on profitable growth. UPL has cut back its capital program to make sure it invests within its cash flow. In doing so, it was able to trim off more than a billion dollars from its capital plans for this year alone. Going forward, the company will have the ability to spend more capital as cash flow increases. UPL's management team has chosen this strategy to keep the business more efficient and cash flow positive. It wants to avoid the possibility of any possible cash flow problems going forward, and this new strategy will allow it to stay within its means and only spend what it can afford to.

UPL has robust projections when it comes to future production, as it believes that by 2016 it can grow production by 42% while its EBITDA will more than double. These conservative projections only assume a minimal rise in natural gas prices. However, it's very likely that the price of natural gas will rise above the $4.50 that Ultra is modeling it to be by 2016. If this is true and natural gas prices do rise higher, then UPL will easily exceed projections, benefiting the business in many different and positive ways. Higher natural gas prices will lead to an increase in both total revenue and overall profit for UPL. In turn, this will lead to higher cash flow numbers, giving UPL more capital to reinvest back within the business -- which will only further promote increased growth and production. In turn, all of these added benefits will lead to a stronger long-term outlook for UPL, leading it to beat all future earnings estimates -- which will only further propel the stock higher.

UPL is already having a strong year in 2013 as share prices are up 28% year to date. Going forward we firmly believe that UPL will be a quick riser, and we project shares to be trading at $37 12 months from now, a total net yield of 63%.

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.