With themarket hitting record highs, value investors are
having a tough time searching for bargains.
Don't get me wrong, I'm as pleased as anyone to see green numbers
flashing when I check my trading account.
But as price-to-earning (P/E )multiples rise, so does risk. And
I've become much more cautious in the past few months about
making newinvestments .
I've been on the hunt for the bargainstocks Wall Street has
overlooked. And today I've found two companies in the energy
sector that remainundervalued compared to their peers and the
market as a whole.
As regular StreetAuthority readers know, the energy boom
currently underway in the United States presents a huge
opportunity for investors.
New drilling and hydraulic fracturing (or fracking) technology
have given energy companies access to enormous oil and natural
gasdeposits that were previously out of reach.
StreetAuthority's energy and resources expert Nathan Slaughter
has been covering this story for years in his
Scarcity and Real
The two companies I've come across,
Apache Corp. (
Devon Energy (
, are involved in the exploration, development and production of
natural gas, oil and natural gas liquids.
And right now, both are selling for cheap. In fact, Devon hasn't
been this cheap since (briefly) in 2011. Apache hasn't been this
cheap since 2008.
Not only are thestock prices low on a historicalbasis , the
P/E and price-to-book (P/B ) ratios for both companies are low in
relation to their peers.
Devon is currently trading at 11 timesforward earnings per share;
Apache trades at just 8 times forward earnings. Devon's current
P/B ratio sits at 1.2, while Apache trades at a P/B ratio of 1.
These numbers are a bargain in relation to competitors. For
EOG Resources (
currently trades at a P/E of almost 19 and a P/B of 2.6.
Now, just because a stock is trading for cheap doesn't always
make it a good buy. Sometimes a stock price is down in the dregs
for good reason, and investors would be wise to leave it alone.
But I think this situation is different.
The profitability of both companies has suffered not because of
managementissues or drastic declines in production. Instead, it's
been caused something beyond their control -- namely, the low
price of natural gas. This has reduced profitability in the
shortterm and kept share prices low.
But the long-term outlook is a different story...
Let's start with Devon.
Devon has a healthybalance sheet after recently unloading less
profitable assets (notably offshore and overseas holdings). This
should allow the company to better focus on its core domestic
assets and help it weather any future declines in energy prices.
Devon currently owns 1.3 million acres and 2,600 producing wells
in the Permian Basin in West Texas. This region is home to the
well-known Spraberry Field, where 10 billion barrels have been
recovered since drilling began in the 1950s.
Devon has recently reported impressive test results inside a
Permian Basin area known as the Cline Shale. Devon's wells show
that the formation contains 3.6 million recoverable barrels of
oil per square mile. As the Cline covers about 9,800 square
miles, this works out to estimated reserves in excess of 30
These reserves could easily eclipse the Bakken (4.3 billion
barrels, according to conservative government estimates) and the
Eagle Ford (3 billion barrels). Devon's total proven reserves
stand at 3 billion barrels of oil equivalent.
In contrast to Devon's relatively stable balance sheet
(especially for an energy exploration and development company),
Apache is in thered , thanks to $18 billion in recent
These deals include a $4 billionmerger with Mariner Energy and
$11 billion inasset purchases from
Exxon Mobil (
While this might be a red flag for some companies, Apache has a
history of making profitable acquisitions. Big purchases in the
past, such as a North Sea position in 2011 and a Gulf of Mexico
deepwateracquisition in 2010, have proved profitable for the
Should these new acquisitions also prove successful, this could
be a great time to purchaseshares while the stock price is still
cheap and before these new assets begin production.
Another contrast between the two companies is Apache's presence
Apache's domestic assets account for about 40% of its production
and close to half of its reserves, but it is also a major
international player, especially in Egypt, Australia, Argentina
and the U.K. region of the North Sea.
Egypt is home to Apache's largest overseas position and accounts
for about 20% of the firm's production. This area is prone to
political unrest, and the company's large stake in the region
makes it a more speculative play.
Risks to Consider:
Energy exploration and development companies are, by their
nature, riskier investments. Should the price of oil and/or
natural gas remain depressed, itwill continue to have a negative
effect on profitability.
Action to Take -->
For investors willing to shoulder the risk, I believe both stocks
are worth theinvestment at today's prices. However, be sure to
maintain your stop-losses and to position speculative investments
as a smaller portion of your overall portfolio.
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