5 Energy Stocks For Consideration: Hit Or Miss?

Includes: COP, ECA, RDS.A, SXL, YPF
by: Vatalyst

While the volatility of oil prices continues to impact the markets, their overall direction is clearly up, so finding and developing natural gas reserves around the world continues to occupy the major portion of most energy companies' budgets in 2012.

Unlike oil, natural gas production is not dominated by areas with the largest reserves, relieving some of the difficulties of dealing with politically unstable governments. Iran and Qatar have the second and third largest reserves after Russia but provide only a fraction of global production. North America, which consumes 26% of the world's supplies of natural gas, offers a combination of extensive reserves and pipelines. With opportunities and roadblocks around the world, there are a variety of alternatives to consider. In this article, I will explore five energy stocks which are all reacting to new market developments. As always, please use my analysis as a starting point for your own research.

Argentina-based YPF Sociedad Anonima (NYSE:YPF) is a high-yielding energy stock, more than half of which is currently owned by Spain's Repsol (REPY.PK), although Repsol began selling down its shares after the Argentine government put regulations on the prices Argentine companies could charge for oil and gas. ADR shares of YPF stock sold recently at just over $32, near the bottom of their 52-week range of $31.00 - $53.47. The 9% current yield on annual dividends of $3.35 is attention getting, and assuming oil prices continue an irregular path upward, the company's prospects appear positive, especially in light of their recent discovery of shale oil reserves. However, in the wake of local government actions, YPF has been highly volatile - a negative when oil prices decline as they did for much of 2011. Add to that the effects of currency fluctuations and the overall weakness of the peso, YPF should only interest investors comfortable with the excitement of an emerging economy and a government's desire to build local wealth.

Neither its vast North American acreage nor its awards for environmental initiatives protected EnCana Corporation (NYSE:ECA) stock from a dismal slide in 2011. It closed recently at $19, near the bottom of its 52-week range of $17.02 - $35.22, as the price of natural gas languished during much of the year. The stock yields 4.1% on earnings per share for the past 12 months of -$0.16 per share in the wake of five consecutive quarters of negative cash flow. EnCana has been engaged in a divestiture program, selling some assets in an effort to strengthen its balance sheet and build its emphasis on liquids. They recently sold two of their gas processing plants to another Calgary-based energy company, Veresen Inc. (VSN), for $911 million. EnCana is also working on joint ventures for some of its properties that would allow it to trim capital expenditures and enter into long-term processing fee agreements. As a leading North American producer of oil and gas with extensive reserves, EnCana is worth following, especially since the stock is low priced. In my opinion, the associated risks seem to warrant a "wait and see" policy for the time being.

Sunoco Logistics Partners L.P. (NYSE:SXL) is a Canadian Master Limited Partnership (MLP), 31% of which is owned by it parent, Sunoco, Inc. (NYSE:SUN). Last year was the third positive year in a row for Sunoco Logistics despite turbulence in the energy markets. The stock is selling around $39 a share, at the top of its 52-week range of $24.40 - $39.98, with a price earnings ratio of 15.5%. Its current yield is 4.4% on annual dividends of $1.68 and earnings of $2.54 a share. Sunoco Logistics has raised its distributions for the past 11 years in a row. Its fourth quarter results far exceeded analysts' estimates, and the vast majority of the partnership's future income is locked in by contracts with major oil producers, making the stock less sensitive to swings in energy prices. The company is also working on pipelines to transport ethane from the Marcellus shale regions in Pennsylvania to processing facilities in Canada. I believe its strong record, reliable income and growth prospects have helped propel the stock to its current heights, making it far less of a "buy" than in the past, but it may still offer opportunities for long-term investors who proceed with prudence.

Last summer ConocoPhillips (NYSE:COP) announced its intention to split into two companies in the first half of 2012 - a refining and marketing business and an exploration and production unit. The stock recently closed around $73 a share, near the mid point of its 52-week range of $58.65 - $81.80, with a price earnings ratio of 8% and a current dividend yield of 3.6%. Conoco lost ground in January after the company announced fourth quarter earnings of $3.4 billion adjusted to $2.7 billion after special items, such as settling legal claims stemming from oil spills in China. The stock bounced back in early February after the company declared a quarterly dividend of $0.66 a share.

The spin-off creates synergies for both units and analysts have also been speculating on the post-split value of the businesses. The new exploration and production entity (which will retain the Conoco name) will be able to increase its focus on searching for new assets. The new refining and marketing arm ("Phillips 66") will become the world's largest independent U.S. refinery and will benefit from rising prices in refined products. Investors who buy before the ex-split date in the second quarter of 2012 will receive two shares of Phillips 66 for every Conoco share they own and will maintain the current $2.64 a share in dividends, according to management, while holders of the new Phillips 66 shares are likely to receive $0.80 in dividends. In my opinion, both sides of this coin offer opportunities for investors.

Although its global reach exposes Royal Dutch Shell Group, Plc. (NYSE:RDS.A) to regional instability, it is one of the world's largest companies, with operations in more than 100 countries directed from its headquarters in The Netherlands. The stock's A shares closed recently just below $73, near the top of their 52-week range of $57.90 - $77.97. Shell's yield was 4.7% on annual dividends of $3.36, and earnings of $9.94, with a price earnings ratio of 7.3%. The company has undertaken cost reduction initiatives, exiting less profitable markets and streamlining the organization as part of its efforts to boost returns. In early February Shell signed an agreement allowing PetroChina Co. (NYSE:PTR) a 20% stake in a Canadian shale gas project for an undisclosed amount. The company is planning to spend $30 billion in capital investments in 2012, most of it going to over 60 new exploration and production projects around the world. Although the stock is expensive, I believe this high quality company is well managed and a good bet for long-term investors with the patience to wait for buying opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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