The investing environment for oil & gas producers remains bullish in 2008, as record oil prices headline the news almost daily… and analysts see a lot more coming. Since Goldman Sachs predicted a two-year move to $200 in the commodity, people have had renewed confidence in buying up companies that deal with oil, and its cleaner alternative, natural gas.
There have been many doubters out there that you should be made aware of. With the newest dramatic upward spiking in commodities, many investors claim that prices are artificially inflated. While this may occasionally hold true, it doesn’t mean they won’t continue to inflate artificially… making you money along the way. Despite the very fact that all of those companies look expensive as heck, I think that the trend up will continue… and it is always better to get in on the action than be sitting on the sideline, sucking your thumb. 😉
The net Fool’s Stock Performance
Back in January, I advised buying four energy superstars, all of which would have made you double-digit profits by now. Transocean (NYSE: RIG) is up 15.20% since my call back at $140.10, and I am still bullish on their solid oil drilling capabilities after their fantastic first quarter results on May 07, I am maintaining a “buy” on the stock. When you bought into Schlumberger (NYSE: SLB), you would be sitting on a pleasant 10.42% profit from my original pitch at $96.57. Schlumberger is the biggest oil-services company in the world, so if you want the safety of a large company… you’ll love SLB, who still has numerous upside. My best recommendation within the sector was with Halliburton (NYSE: HAL) which would have given you a 31.70% return since my buy at $37.26. I think it might be time to take profits off the table on Halliburton, moving into another energy stock. The upside is still there, but I feel your money would be better off elsewhere. Finally, XTO Energy (NYSE: XTO) has absolutely torn it up since my pitch at $53.88, rising for a 25.95% profit. XTO is an oil & gas exploration company that I maintain a “buy” rating on, still very bullish with loads of room to maneuver.
Where To Go Now
The energy sector as an entire has been rising off the charts over the past few months. But I don’t desire you in the companies which might be the staple crop of energy, your Exxon Mobiles and your Chevrons… go to source! I’m talking in regards to the guys which are drilling the oil and natural gas directly, spinning them off for profits. Now you’ve heard from the drillers… I need you in those hybrid oil/gas companies like XTO Energy to capitalize on both markets and diversify risk. Personally, I’m far more bullish on natural gas than oil. I feel that the gas is rather more valuable as an energy source but has been largely undiscovered in comparison with oil by the media, and hasn’t seen the identical value appreciation that it deserves. So here are some cream of the crop hybrids with a favorable slant toward natural gas!
Chesapeake Energy Corp. (NYSE: CHK):
Chesapeake is the number one independent producer of natural gas, but still has quite a lot of hedged risk to thwart the volatility factor. It’s the primary driller with 254 rigs and has beaten the market again and again with its superior hedging strategies. You’ll be able to bank on the fact that they grew production by an even bigger percentage than some other large-cap competitor. Lot’s of worry over the share price is cast toward Chesapeake, but they have performed past expectations time and time again, so you possibly can sleep soundly with the fact that they have issued stronger guidance than any competitor in my view. There are some huge reserves that CHK has actively pursued, and I feel the most effective is yet to come back.
Anadarko Petroleum Corp. (NYSE: APC):
Well, they crushed earnings consensus of $1.22/share with $1.55/share… cannot say you couldn’t expect such stellar news from a great company that has been growing faster than the industry for a while now. This trade isn’t done yet, and after an upgrade by Lehman Brothers on May 16th, it is clear that investors still see the upside. Following earnings, it appears like sunny skies all year long for Anadarko… an organization trading at just 15.5 times earnings in comparison with an industry ratio of 23. APC has proven to investors that it can be one of the best in a high-growth industry… and I’m still buying.
Helix Energy Solutions Group (NYSE: HLX):
Helix does a whole lot of oil & gas production in the Gulf of Mexico, and i believe they fly largely under the radar within the energy sector because of their low market cap. Their new Danny-Noonan fields should really benefit earnings for 2009, and could even be a catalyst in 2008. But more importantly than new exploration activity, Helix has taken a success that I feel is undeserved, essentially because of how their petroleum services unit is tied to their exploration unit. Due to this, Helix has one of the more attractive valuations within the sector. While they may not have the profit margins to beat out competition, HLX is a silent assassin with a low P/E of 11 and a chip on their shoulder.
Apache Corp. (NYSE: APA):
High operating costs and expenses were largely offset by earnings from high oil and gas prices as well as increased volume production over the primary quarter. Apache has probably the greatest managed companies in the business, and that i see them outperforming the industry in the long run… even though there are bordering target prices. Apache has benefited in addition to anyone else from five major discoveries, and i feel that APA can fully explot their North American reserves to profit in a beaten-down market in 2008.
Average growth rates for natural gas drillers is 15%, so it is really quite hard to find a loser in this environment. I see the next companies outperforming the industry in 2008: Chesapeake (CHK), XTO Energy (XTO), Anadarko (APC), Helix (HLX), Transocean (RIG), Schlumberger (SLB). I’m rating these energy stocks as market-perform based on valuation: Apache (APA), Halliburton (HAL), Noble (NE), Devon Energy (DVN), Southwestern Energy (SWN).
One thing is for sure, the oil and gas explorers are outperforming nearly every corner of the market. These stocks are poised to outperform in 2008. My investment strategy can be to wait for a $5-$10 pullback in the price of oil before pulling the trigger on one of these companies, primarily because I do feel that the run-up was a bit too quick.