With every passing month, we read another report about
our nation's fast-track path to energy
. Our domestic production of oil and gas is growing so rapidly,
that we may just be a half-decade away from ending our long
addiction to imported energy. And this would be great news for our
nation's tradedeficit , employment picture and national
Despite the ever-brightening energy picture, it's still quite
easy to find value-pricedstocks in this sector. Dozens of stocks
trade at reasonable levels in relation to theircash flow ,asset
base and long-term growth prospects. I ran a series of screens to
help bring a sharper focus to these industry value plays.
By triangulating the results of several screens, it's possible
to see the deepest values in this steadily-growing sector.
While stocks in many other industries are often assessed by their
price-to-earnings (P/E ) multiples, this metric isn't quite as
useful for energy-exploration firms. They have such intense capital
requirements and high levels ofdepreciation andamortization to
write down their capital expenses, that net profits can be
misleading. Instead, cash flow is the more salient metric.
I looked at all of the oil and gas drillers that are either
headquartered in the United States, or trade on U.S.stock exchanges
through American depositary receipts, with amarket value of at
least $500 million. I found 60 that trade for less than six times
trailing cash flow.
To narrow down the list, I only focused on companies that trade
for less than 1.25 timesbook value . This means these companies
have solid underlying support, trading near or below the value of
their base of assets. The list was narrowed down to 16 stocks, as
you can see below.
The Cheapest Energy Stocks I've Found
A pair of energy producers that have exposure to Argentina (
YPF S.A. (
Petrobras Argentina (
) have been eliminated from this group because these companies now
face a risky operating environment thanks to recent government
policy changes. Still, it's noteworthy that some of the energy
producers (in terms of price) hail from countries such as Russia
(Lukoil), Italy (Eni), France (TOTAL) and the U.K. (
). Sometimes, as Elliott Gue, chief strategist of StreetAuthority's
newsletter, can attest, you need to venture abroad to find an
industry's top bargains.
Taking the group of stocks above, let's look at what would
happen if we first focus on price-to-book-value measures, and
secondarily at price-to-cash flow. Here's the revised ranking.
Notably, these foreign oil producers don't stack up as well, as
they mostly trade above book value. I dug deeper into this group,
focusing only on the eight stocks that trade for book value -- or
less -- and that trade for less than six times trailing cash flow.
Two stocks stand out as especially appealing...
1. WPX Energy (
This company mostly focuses on the production of natural
gas, so its appeal depends on your interest in this energy source
relative to crude oil. (We happen to think natural gas has alot of
potential. To find out why, click
Thanks to the sharp drop in gas prices during the past few
years, management has throttled back output to restrain capital
spending. Still, even with low gas prices, the company's strong
positioning in the Piceance Basin in northwest Colorado, where its
drilling costs are quite low, is setting the stage for solid cash
flow in the years ahead.
On the upcoming fourth-quarter conferencecall , management is
expected to discuss a sharp rise in output that began in the fourth
quarter, coupled with more than $200 million in annualized cost
reductions. WPX expects to generate more than $1 billion in
in 2013, which would be the strongest since the boom years of
Looking beyond cash flow, this is a very cheap stock in terms of
the assets in place. The company sports about $5.4 billion in
tangible book value, but is valued by themarket at less than $3
2. Bill Barrett (
This company is shaping up to be an interestingturnaround play, or
it may simply just becomebuyout fodder. The energy-exploration firm
just lost its two top executives (including the son of the
company's founder) as shareholders chafe at a poor track record.
Indeed, this stock has been on a losing streak for two
Several years of missed financial targets have apparently led to
a rift between management and the board, which is now seeking out
Analysts expect the new management team to reduce the company's
focus on new projects and squeeze more cash flow out of existing
projects.EBITDA has been stuck at about $400 million in each of the
past four years, even as productionvolume andrevenue have risen.
That's not a good sign.
If the new management's likely greater emphasis on
cash flow yields results, then this stockwill begin to look quite
cheap based on that metric. If not, then larger players in the
industry may seize the initiative and make a buyoutoffer as the
company has $1.17 billion in tangible assets, but a current market
value of less than $800 million.
Risks to Consider:
Energy prices are a big factor in industry stock price
performance. These stocks look attractively-priced relative to the
peer group, but would fail to rally if energy prices slump.
Action to Take -->
These stocks represent solid value by a pair of metrics. In light
of the North American energy boom, they offer the prospect of solid
growth in tandem with that value proposition.
Of the two stocks profiled here, WPX Energy provides a fairly
low-risk path to share price gains, as management needs to simply
deliver on the announced cost cuts and production increases. Bill
Barrett is more speculative, but could offer fairly
significantupside if reduced capital spending leads to robustfree
cash flow . The fact that both of these stocks trade well below
tangible book value means they provide meaningful downside
-- David Sterman
P.S. -- The abundance of natural gas in the United States could
lead to a third industrial revolution. One analyst is predicting a
stock could rise $1,566%. Another stock has already jumped more
than 1,000% and is expected to keep going. To learn more about
investing in the natural gas boom, click here.
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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