Energy Stocks Down On Their Luck; Consider These 3: ConocoPhillips (COP), Occidental Petroleum Corporation (OXY)

Page 1 of 2

The rally continues. With a pullback in late February only knocking down the S&P 500 index by 3%, it seems the “dip” that everyone was waiting for never came. Troughing at 1485 on February 26th, this broad index has climbed to a multi-year high of just over 1540, an increase of another 3.7%.

For those value minded investors who don’t like to chase, myself included, the pressing question is “what now?” Buying names that haven’t participated in a rally are often a bad idea: laggards are laggards for a reason, after all.

ConocoPhillips (NYSE:COP)

One lagging sector worthy of an exception, however, is Energy. According to a report by Bespoke, the Energy sector is among those with the fewest stocks above their 50-day moving average. At the same time, the Oil and Gas industry is undergoing a technological revolution that is returning production to North America and is doing so at a low cost.

Increasing supply is a big reason why global prices of oil and especially natural gas have come down. Worries of oversupply are keeping Energy stocks from participating in this rally.

I think these worries are unwarrented. Low cost of production in many of these new fields will keep things profitable in North America. Most of the pain will be felt in traditionally “marginal” production countries whom require high oil prices in order to be profitable.

In the meantime, investors can buy high-quality oil producers at a reasonable price. Today I will look at three of my favorite. All of them pay a good dividend and they are all poised to benefit from the trend of increasing North American production. They are listed by relative conviction from lowest to highest.

BreitBurn Energy Partners (NASDAQ:BBEP)

Market cap: $1.93 billion

Dividend Yield: 9.7%

Debt/EBITDA: 2.5 (vs. 2011 average of 4.6)

Dividend Coverage Ratio: 1.1x

BreitBurn Energy
Partners is an oil and gas Master Limited Partnership (MLP) which acquires, develops and exploits properties in the US. Founded in the 80s on the idea that technology would bring more oil discoveries in North America, BreitBurn’s goal is to acquire properties with long-life reserves, further develop, exploit and ultimately return cash to shareholders. They don’t engage in exploration.

Currently, BreitBurn is trading right at its book value with a very compelling dividend. All discounts come for a reason, however. Since BreitBurn does not engage in exploration, they grow production and earnings through acquisition only. Like many MLPs, they have a target leverage ratio, and so acquisitions are funded by dilutive secondary offerings. In full acquisition mode now, BreitBurn has done five secondary offerings in the last two years, keeping the stock price down.

However, I still think BreitBurn is a good value here. The company has a debt/EBITDA ratio lower than most MLPs. Although their dividend to distributable cash flow is narrower than I would like, most of their oil and gas production is already locked in through price hedging. This predictable cash flow keeps the dividend secure.

ConocoPhillips (NYSE:COP)

Market cap: $70.6 billion

Dividend yield: 4.56%

Debt-to-Capital Ratio: 31%

The newly independent ConocoPhillips (NYSE:COP), now an explorer, producer and transporter of crude oil, natural gas and natural gas liquids, has been an early mover in unconventional drilling in North America. They are in the midst of a restructuring that will ultimately result in 3-5% long-term production growth and significantly higher margins per barrel of oil.

To achieve this, the company has acquired many acres of land while beginning some time-consuming and capital-intensive projects in North America. At the same time, they have been shedding far-flung legacy production assets. Less production now and more spending for future projects resulted in a substantial funding gap in 2012, which has spooked investors.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Jobs that May Exist in the Future

The Absolute Best States to Shop in the US

5 Best States for Golf Adventures

Top 15 Places To Visit Before You Die

10 Most Expensive Smartphones in the World

10 States with Lowest Physician Density

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!