Inside Wall Street: Energy stocks for an election year
These 3 picks are among oil shares that should outperform.
As a group, these shares have been outstanding performers during those important periods since 1972, gaining an average 15.6% and outperforming the average 5.9% gain for the S&P 500.
"The S&P Energy sector beat the market 80% of the time during presidential election years," says Sam Stovall, the chief equity strategist at Standard & Poor's Capital IQ. The second-best-performing group is the S&P Consumer Staples sector, which gained an average 10.2%. The S&P Industrial group also outperformed the market during the presidential election years. But don't bet on information technology stocks or the materials or telecom services sectors. "They were the weakest performers during that period," Stovall warns.
Oil prices rising again
After a brief slump, the price of crude oil is again on the rise. Brent crude oil rose from a recent low of $103.76 on Dec. 16, 2011, to $111.88 last week. The latest worry concerning oil is Iran's threat to block the Straits of Hormuz to prevent ships from transporting oil. Iran is responding to U.S. and European sanctions resulting from the country's buildup of nuclear weapons.
"On Dec. 19, we reiterated our recommendation to overweight the energy sector, especially the small/mid-caps," says Ed Yardeni, president and chief investment officer of Yardeni Research. While he noted that the slow global economic growth will likely depress demand for oil, "I remain convinced the sector is a very good hedge against the geopolitical turmoil in key oil-producing countries," argues Yardeni.
Apache provides 'solid growth visibility'
Among the S&P's list of strong buys in the oil field is Apache (APA), one of the largest independent oil and gas exploration and production companies in the U.S. "Its large international oil projects provide solid growth visibility," says S&P equity analyst Michael Kay. The company has been in a multi-billion dollar acquisition binge that he believes will add significant future opportunities in core regions, including Canada and Egypt. In September, Apache agreed to acquire ExxonMobil's (XOM) North Sea assets for $1.75 billion.
In the first nine months of 2011, Apache's production was up 18%, notes Kay. A resumption of deepwater drilling in the Gulf of Mexico should allow it to begin exploiting an inventory of deepwater projects. Kay has a 12-month price target for Apache's stock, now trading at $95 a share, of $145. He figures Apache's earnings will jump to $12.45 in 2012, up from an estimated $11.80 in 2011. In 2010, it earned an adjusted $8.92 a share, reflecting production and oil price gains.
Anadarko is recovering from Gulf spill
Anadarko (APC), another major independent oil and gas exploration and production company, suffered from the huge oil spill in the Gulf of Mexico, pounding its stock down to the $50s. It has since recovered and is currently trading at $79 a share. Anadarko paid British Petroleum $4 billion to settle all present and future claims related to the Deepwater Horizon oil spill disaster in the Gulf.
"After the $4 billion settlement, investors' focus has shifted to Anadarko’s top-tier exploration and production portfolio, production ramp, exploration catalysts, and strong balance sheet," says Kay, who rates the stock a buy. The company has cut costs, and partly with its strong cash flow at growing U.S. onshore assets, Anadarko will be able to pay cash for the settlement.
At the same time, Anadarko has become a shale play. It has expanded its liquid-rich opportunities by assembling a 300,000 gross acreage position in the Utica Shale, says Kay. Successful results in Mozambique, where Anadarko has made its biggest gas discovery, have been a recent catalyst, adds Kay, who has a price target of $90 for the stock.
Based on higher-margin natural gas liquid production growth and higher oil prices, he sees the company earning $3.05 a share in 2012, up from an estimated $2.95 in 2011. The estimates is adjusted for the $5.36-a-share one-time charge in the third quarter related to the Gulf oil spill.
Devon: An underpriced energy stock
Devon Energy (DVN), an independent energy company focused on acquiring, developing and producing oil and gas, recently formed a joint venture with China’s Sinopec (SHI) for $2.2 billion. The deal gives Sinopec a one-third interest in Devon’s five new ventures in the U.S., including projects in Michigan, Mississippi, and Utica.
It is Sinopec’s first joint-venture deal in U.S. oil and gas assets, signaling continued interest in the U.S. resources, says Hsulin Peng, analyst at investment firm Robert W. Baird, who rates Devon as outperform with a 12-month price target of $83 a share. The stock is currently trading at $64.
"Devon provides an attractive way to invest in a diversified U.S. and Canada natural gas and (natural gas) liquid plays," says Peng. In the past two years, Devon sold its international and offshore Gulf of Mexico properties, raising $10 billion, in order to focus more on onshore North American plays or assets. The proceeds were used mainly to reduce debt and fund its recent $3.5 billion share buyback program.
Devon, some analysts argue, is one of the most underpriced energy stocks. The stock's 52-week high of $93.56, but some argue it deserves an even higher price. "We reaffirm our constructive investment posture and buy rating on Devon shares, which continue to trade at a sizeable and unwarranted discount to the underlying value of the company’s asset base," says Mark Gilman, analyst at investment firm Benchmark. His 12-month price target: $135 a share.
Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
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