Even though we are in a bull market, not all sectors participate in the major trend at the same time. While financial stocks have been doing well lately, energy stocks have been underperforming the broad market. This pattern is almost always seen in the stock market and is the basis of a trading strategy known as sector rotation. To benefit from sector rotation, traders can look at stocks in sectors that are lagging the broad market, buying them when they are bargains expecting their sector to recover in time.
Energy stocks have been beaten down for some time but there are some promising buy candidates in the sector. Before turning to some specific stocks in the sector, we should review the outlook for oil prices since that is a factor that affects energy stocks. In the short run, oil prices have captured headlines due to a recent sell off. With the price of a barrel of oil falling below $50, concerns of another down trend in prices are rising.
The next chart puts the recent downtrend into a longer term perspective, looking at the price of oil since 1990.
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As the chart shows, a long term perspective in oil prices can be useful. This is a commodity where prices tend to be fairly stable for years at a time, trading within a range. The current range seems to be between about $40 and $60. The recent break below $50 attracted a lot of attention but isn’t likely to change the business operations of companies in the industry. Companies that have survived the collapse in oil prices seen since 2014 are likely to be those who understand how to operate when oil trades below $60 a barrel. The survivors most likely have a long term plan for dealing with prices that are even lower than they are today.
One factor driving oil prices down is the oil shale boom occurring in the United States. When oil prices were high, companies seeking to benefit from those prices spent time and money looking for ways to reach oil trapped in shale deposits or in other hard to reach fields. These efforts resulted in significant advances in drilling technology and the subsequent boom in oil is one of the reasons prices collapsed in 2014. US production is now at record highs and this has changed the market, making it likely that lower prices will remain in place for at least the next few years.
Oil production in the US may even increase under the new administration which is taking a friendlier approach to the industry. Approvals of long delayed pipelines will make it possible to move more oil from remote locations to markets where it can be used. Natural gas producers are also likely to benefit from increased access to foreign markets as the administration favors exports and policy changes that should make it easier to ship natural gas to overseas markets.
Companies have now had nearly three years to adapt to this new environment of lower prices. To find investment opportunities, we searched for low priced companies that have maintained favorable coverage from analysts. We found four energy stocks with analysts’ estimates indicating they could deliver gains of at least 20%.
Enduro Royalty Trust (NYSE: NDRO) is a Texas based company that was founded in 2011, to benefit from the boom as oil prices were rising. The company focuses on acquiring and holding a net profits interest representing the right to receive an 80% of the net profits from the sale of oil and natural gas production from certain properties in the states of Texas, Louisiana, and New Mexico held by Enduro Resource Partners LLC.
As a royalty trust, NDRO distributes substantially all of its operational cash flow to its investors, paying a monthly dividend. Although the distribution varies from month to month, the total distributions have totaled $0.24 in the past twelve months, providing a current yield of more than 7%. Analysts expect the company to report earnings per share (EPS) of about $0.25 and $0.43 next year. Earnings of this level support the current payout amount and indicate the payments could increase. If the annual payout rises to about $0.30 a share, a reasonable amount given the expected earnings, the stock could trade at about $4.25 and maintain a 7% yield. That price level would deliver a total return of more than 30% to shareholders.
Tellurian Inc. (Nasdaq: TELL) is a speculative trade on natural gas exports. The stock is the result of a merger that occurred earlier this year. Tellurian Investments Inc. was founded as a private company in February 2016, and on February 10, 2017, it merged with a wholly owned subsidiary of Magellan Petroleum Corporation. Upon completion of the merger, Magellan changed its name to Tellurian and is listed on the Nasdaq under the symbol TELL. The employees and contractors of Tellurian are experienced industry experts developing low-cost LNG infrastructure projects along the United States Gulf Coast.
TELL recently announced that their Driftwood LNG project has received authorization from the United States Department of Energy to export liquefied natural gas (LNG) to free trade agreement (FTA) nations. Tellurian has also submitted an application to export LNG to non-FTA nations and expects to file their Federal Energy Regulatory Commission (FERC) application later this quarter. Driftwood LNG is a proposed 26 million tonnes per annum LNG export facility near Lake Charles, Louisiana in the US Gulf Coast. Tellurian expects to begin construction of Driftwood LNG in 2018 and deliver first LNG in 2022, with full operations in 2025.
Analysts are bullish about LNG exports, noting a large amount of potential exports are already under contract to Asian buyers, even before the facilities to service the market are in place. The company recently hired Societe Generale as financial advisor for the Driftwood LNG project, a move that could lead to news in the stock at any time.
BP Prudhoe Bay Royalty Trust (NYSE: BPT) operates as a grantor trust in the United States. The company holds overriding royalty interest comprising a non-operational interest in minerals in the Prudhoe Bay oil field located on the North Slope of Alaska. The Prudhoe Bay field extends approximately 12 miles by 27 miles and contains approximately 150,000 gross productive acres. As of December 31, 2015, its estimated net remaining proved reserves were 23.052 million barrels of oil and condensate, of which 22.418 million barrels are proved developed reserves and 0.634 million barrels are proved undeveloped reserves.
BPT offers a current yield of about 13%, well above its long term average yield of about 10%. At the average yield, the stock could provide a total return of more than 40% over the next year.
Stone Energy Corporation (NYSE: SGY) is an independent oil and natural gas company. The Company is engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties. The Company operates in the Gulf of Mexico (GOM) basin. It has leveraged its operations in the GOM conventional shelf and has its reserve base in the prolific basins of the GOM deep water, Gulf Coast deep gas, and the Marcellus and Utica shales in Appalachia. Its estimated proved oil and natural gas reserves are over 60 million barrels of oil equivalents (MMBoe) or 340 billion cubic feet equivalent (Bcfe). Over 95 MMBoe or 570 Bcfe of its estimated proved reserves are revised downward. It has made investments in seismic data and leasehold interests, and has geological, geophysical, engineering and operational operations in deep water arena to evaluate potential exploration, development, and acquisition opportunities. It holds over two deep water platforms, producing reserves and various leases.
Analysts are bullish on SGY after the stock price fell 99% from its 2014 high.
Fourteen analysts follow SGY and most rate it a buy. After the steep sell off, there is little downside in the stock.
Energy stocks could be ideal for value investors and these four stocks are worth considering.