Tags: gil | shidlo | Undervalued | Energy | Companies | Drawing | Power

Undervalued Energy Companies Have Drawing Power

Tuesday, 05 July 2011 07:00 AM

A few smart financiers have become ultrarich by investing in out-of-favor stocks or commodities – such as Sir John Templeton, George Soros, and T. Boone Pickens.

Pickens, a billionaire from Dallas, Texas, has been involved in the energy sector through his long career. Pickens has been one of the early supporters of natural gas. Since 1997, he has called for the use of natural gas to power the country’s transportation system. Natural gas has many advantages, such as being domestically available and thus reducing imports and foreign dependency. It also provides cleaner energy by up to 30 percent compared to gasoline or diesel vehicles.

Although Pickens has a head-start over most investors and is way ahead of the curve, it doesn’t mean that one cannot still profit from investing in natural gas.

Another legendary billionaire, Warren Buffett, held at the end of the first quarter this year shares via Berkshire in Exxon Mobil and ConocoPhillips.

The recent correction in commodities has created an opportunity to buy undervalued U.S. energy stocks.

There are quite a few reasons to invest in this sector now.

If one is a contrarian investor with a medium to long term horizon, avoid the recent tidal wave of IPOs by social-networking companies, which might be the next Internet bubble.

Another reason to invest in energy companies that are heavily involved in gas production is because of their seasonal benefits. Recent reports by The National Oceanic and Atmospheric Administration (NOAA) forecast there will be 12 to 18 named storms in the June 1 to Nov. 30 hurricane season. Out of these storms, six to 10 are forecast to be hurricanes and three to six of those could be major hurricanes.

In 2010, the United States was lucky that it had a low number of major hurricanes. The demand for gas increases sharply during the stormy summer, as people tend to use air condition heavily. Demand for gas also increases during cold winter months.

Although some media sources have been recently criticizing the natural gas industry by saying that companies have been overstating their supply of shale gas reserves and claiming they will deliver questionable big profits, one should question the objectivity of these allegations.

Critics also state that extraction of gas from the ground might be more expensive than predicted as well as have possible harmful effects on the environment.

Recent mergers and acquisitions by major companies who came in late into the natural gas sector such as Exxon Mobil (paying $41 billion last year for natural gas company XTO Energy), CNOOC, Shell, Mitsui, BP and many others investing in gas reserves – suggests that they believe in the future of natural gas.

Big oil companies wouldn’t invest in natural gas if they thought this sector didn’t have a future. One can agree that at the current low prices of gas, profitability is questionable. In a mid- to long-term perspective, prices should rise and equilibrium can be achieved. More mergers and acquisition in the energy sector can be expected in the future.

Although it is risky to invest in companies that are a pure play on natural gas, an investment in energy companies that have both oil and gas reserves might make more sense.

Two such energy companies that also have U.S. operations are Apache Energy (APA) and Anadarko Petroleum (APC). They aren’t the largest players like Exxon Mobil or BP but still have a substantial capitalization. Apache has a market capitalization of $46 billion and Anadarko a market capitalization of $38 billion.

If one looks at their 2011 price-earnings ration, or P-E, then Apache is cheaper – 10 times earnings whereas Anadarko is 23 times earnings. Looking at 2012 earnings, Apache has a P-E of 9.1 whereas Anadarko has a P-E of 18. Looking at price to book (P-B), both are quite cheap compared to major energy companies with Apache having a 1.9 P-B whereas Anadarko has a P-B of 1.8.

If one looks at other valuations, then Anadarko is forecast to have substantially higher earnings in 2012 than Apache. Both companies also have international operations, with Apache having operations not only in the United States but Canada, Australia, the Gulf of Mexico, the United Kingdom, Egypt, Argentina and Chile. Apache has added to its production and reserves in 2010 by buying BP’s oil and gas operation in the Permian Basin as well as in Canada and Egypt. Anadarko operates primarily in the United States (around 45 percent onshore), the deepwater of the Gulf of Mexico and Algeria.

Another important factor to look at when investing in energy stocks is the proven reserves of these companies.

According to the Apache website, the company had proven reserves of 2,953 million barrels of oil equivalent (MMBOE) at the end of 2010. Anadarko had proven reserves of 2.42 billion BOE (equivalent to 2,420 million barrels of oil equivalent) adding about 359 MMBOE during 2010.

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A few smart financiers have become ultrarich by investing in out-of-favor stocks or commodities such as Sir John Templeton, George Soros, and T. Boone Pickens. Pickens, a billionaire from Dallas, Texas, has been involved in the energy sector through his long career....
Tuesday, 05 July 2011 07:00 AM
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