The Second Half Of 2013 - Top Energy Picks

Includes: APA, CEO, INT, NOV, VLO
by: Codespeed

The Energy sector logged the best gain in the month of January in 2013. Based on historical data of the past few decades, in the years when the January performance correctly predicted the year's performance (read about the January Barometer theory), sectors that logged the most gains in January outperformed the other sectors on an annual basis. If this pattern repeats this year too (and this cannot be guaranteed), the Energy sector should outperform heavily by the end of 2013.

The U.S. Energy Information Administration (or EIA) publishes data around global energy demand and supply on a regular basis. According to EIA, global oil demand grew in 2012 and will continue to grow 2013 further by 7% by end of 2013.The global oil demand for 2014 will be 40% higher than the 2013 estimates. In addition, the North American region is showing high on-shore production growth and heavy M&A activity is expected in this region. These are critical success factors for many energy companies. Let us take a look at top picks in the Energy sector, using criteria such as past, present and future (projected) growth in earnings, revenues and cash flows, as well profit margins.

(1) CNOOC Limited (CEO, $166.43 as of 7/5/2013)

1 Year PriceChina National Offshore Oil Corporation, better known as CNOOC, is China's largest explorer, developer, producer and seller of crude oil and natural gas. The company operates in Asia, Africa, North America, South America and Oceania. In January, the company announced that it aims to get 10 new fields in offshore China and 24 projects under construction during 2013. It also targets drilling around 140 exploration wells, as it continues to add new reserves through explorations and acquisitions.

CNOOC's earnings growth in the last five years has been 18.42%, compared to the Oil, Gas & Consumable Fuel industry's average of 3.22%. Its revenue growth in the last five years has been a solid 26.16%, compared to industry's average of 9.83%. Likewise, the cash flow growth rate in the same period has been an impressive 24.31% for CNOOC, compared to the industry average of 9.62%.

The company's Gross Profit Margin in the most recent quarter (annualized) is 38.69% and its annualized Operating Margin in the most recent quarter was 42.05%, easily beating the industry's average of 10.10%. In addition, the company also pays a healthy dividend of 3.7%.

(2) Valero Energy Corp (VLO, $33.85 as of 7/5/2013)

1 Year PriceI discussed Valero around July last year in this article, when its stock was trading at $24.02. This stock has appreciated by almost 40% since then, to the mid-thirties, and I think it has potential to go higher into the forties because of increasing earnings, higher distillate demand, asset reorganization and most importantly strategic location in the U.S. Gulf Coast.

Valero is the world's largest independent refiner with sixteen refineries all over the world, a massive throughput capacity of 2.8 million barrels-per-day and more than seven thousand branded marketing sites that present several brands such as Valero, Ultramar, Texaco, Shamrock and Beacon.

In May 2013's UBS Energy Conference, the company said it expects a "dramatic" growth in the North American shale oil production and that the U.S. Gulf Coast operations will take market share from Western Europe and other foreign markets. Valero plans to increases its capability to export more products and crude while increasing its access to cost-advantage crude oil in North America through their Houston and Corpus Christi refineries in the Gulf Coast.

In the trailing twelve months (or TTM), Valero's EPS grew by 110.70% compared to the previous period. Its long term EPS growth for the next three to five years is projected to be 9.06%, and next year's growth is expected to be 8.72%.

During this UBS conference, Valero also stated that it plans to return cash to shareholders by increasing dividend yield and stock repurchasing plans in the coming years. Valero already pays a decent dividend of 2.4%.

(3) Apache Corp (APA, $82.17 as of 7/5/2013)

1 Year Price I last discussed Apache Corporation in March 2013 when its stock was trading at $75. The stock has had a wild ride since then - it hit $70 in April, and bounced back to more than $80 per share by July. I think Apache can go much higher from here, but the ride will remain volatile (the stock's Beta is 1.5).

Apache is one of the biggest crude oil and natural gas exploration and production companies, with operations in the U.S., Canada, Egypt, U.K., Australia and Argentina. It has a significant producing asset base along with many large and (more importantly) long-term projects, and is very well positioned to benefit most as drilling and exploration shifts its focus to targeting oil and liquids-rich gas.

Apache's next year EPS is expect to grow by more than 10.64% and its long term earnings growth in the next three to five years is projected to be about 6%. The company's revenue growth in the last five years has been an impressive 11.21%, beating the Oil, Gas & Consumable Fuel industry's average of 9.8%. It has been able to achieve this revenue growth in spite of a lower capital spending growth in the same period compared to the industry (10.42% vs. industry's 14.80%), while keeping enormous profit margins (Gross Margin of 65.21% vs. industry average of 26.32%, Operating Margin of 29.2% vs. industry average of 7% and EBITD Margin of 62.09% vs. industry average of 18.87%).

(4) National-Oilwell Varco Inc. (NOV, $71.85 as of 7/5/2013)

1 Year PriceNOV designs, manufactures and sells parts and equipment used in oil and gas drilling and production and provides related services such as oilfield inspection and supply chain integration.

National-Oilwell's stock has underperformed relative to the market since I last discussed this company in March 2013.

However, in the coming quarters, the potential is huge. There is an increasing demand for deep-water capable drilling equipment, due to aging rig-fleets that need retooling, and safety related regulations (especially around North American region).

To meet global energy demand, more exploration activity is expected to occur in next year and beyond, and capital spending in exploration is expected to increase by more than eighty percent in the next five years. In the latter half of this year and later next year, expect NOV to perform well.

The company's EPS growth in the next three to five years is projected to be more than 14%. In the last five years, the EPS growth has been 9.17%, easily beating the Energy Equipment & Services industry average of 1.43%. In the next year, the company is projected grow EPS by as much as 17.59%.

The company's revenue growth in the last five years was 15.4% (beating the industry average of 10.60%). Revenues grew by 23.33% in the most recent quarter, compared the same quarter in the previous year. In the last five years, NOV's cash flows grew by 15%, again beating the industry average of 9.33%.

In addition, NOV operates at a high Gross Margin of 28.32%, EBITD Margin of 19.70% and Operating Margin of 16.59% (all on a TTM basis). With that kind of operating efficiency, NOV, as a major equipment maker, is in a nice spot to make the most of the market trends.

(5) World Fuel Services Corp (INT, $41.50 as of 7/5/2013)

1 Year PriceWorld Fuel Services is a leading company providing fuel products and fuel logistics services globally to hundreds of airports, sea ports and truck terminals. The company is poised to gain market share in the land segment, which offers fuel and related services to petroleum distributors and operators.

INT's past five years have been phenomenal, with revenues growing at 23.19% (compared to Oil, Gas & Consumable Fuel industry's average of 9.83%) and cash flows growing at 25.83% (compared to industry's average of 9.62%).

Earnings grew in the same period by 18.81% compared to industry's average of 3.22%, and the company's Book Value per share grew by more than 19% during this time.

On a TTM basis, the revenues have grown by 7.55%. The earnings are expected to grow by 12.4% in the next year.


Evaluating companies based on past growth as well as future (projected) growth in revenues and earnings helps us identify a longer term momentum story and the numbers give us insight regarding the company's prospects. Operating efficiencies can then be evaluated by looking at margins and comparing with the industry averages, so we can identify companies that are best capable of optimizing market opportunities.

The companies discussed in this article are well positioned to outperform among their peers in the next couple of years, and they have performed well in the past we well.

Pullbacks in these stocks are good opportunities for investors to add to or increase their positions.

Disclosure: I am long APA. 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.