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

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

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!