Ahead of the competition
Not all US energy producers have the same type of growth profile that SM Energy enjoys.
For example, Southwestern Energy Company (NYSE:SWN) is expected to grow earnings by less than 10% between 2013 and 2014, and yet the stock is still trading at a multiple of roughly 20 times forward earnings.
Southwestern Energy Company (NYSE:SWN) is active in purchasing new land for exploration and development. In late April, the company inked a deal with Chesapeake Energy Corporation (NYSE:CHK) to buy 162,000 acres for a price of $93 million.
With a significant debt load of $1.7 billion, and a debt-to-equity ratio listed at 55.3, Southwestern Energy is taking on near-term financial risk. If investments in new acreage pay off quickly, investors will benefit. But the big question is whether Southwestern Energy can develop this new acreage quickly enough – especially since natural-gas prices are still at a relatively low price point.
Unless Southwestern Energy Company (NYSE:SWN) is able to surprise investors with increased production or wider-than-expected profit margins, investors are likely to endure losses, or at best, find themselves sitting on a dormant asset while other energy stocks advance.
Similarly, Apache Corporation (NYSE:APA) is expected to grow earnings by roughly 11% between 2013 and 2014. Apache’s stock is priced much more reasonably at about 10 times expected earnings.
This reduces the amount of risk that Apache Corporation (NYSE:APA) shareholders are subjected to, but with much less growth over the next 18 months there is an opportunity cost in play.
Even though Apache Corporation (NYSE:APA) has been able to successfully increase production levels over the past few quarters, the company has been unable to convert that additional production into actual earnings growth. In fact, over the last year, the company has missed analyst expectations every single quarter.
Apache’s management team has begun working on shifting the company’s focus to “drive production growth, and create shareholder value.” This year, the company will divest $4 billion in assets and use the proceeds to reduce debt and also repurchase shares.
The new arrangements will help create a more stable financial base for the company, but will not help in boosting the company’s overall growth. As a long-term investor, I would rather own a company that is actively investing in growth, rather than divesting assets for financial stability.
Invest before the next earnings announcement
I would recommend picking up shares of SM Energy Co. (NYSE:SM) well in advance of the next quarterly earnings announcement, which is scheduled for July 29.
Since analysts have been active in boosting their expectations following the last earnings announcement, it is likely that institutional investors will begin building positions ahead of the next announcement. This additional demand is likely to drive the stock significantly higher over the next few months.
Take advantage of SM Energy Co. (NYSE:SM)’s tremendous value today and consider adding to your position incrementally as the story plays out. I expect that the news flow will continue to be strong for this impressive growth company and I look forward to seeing just how conservative the 50% target turns out to be.
The article Book 50% Gains With This Energy Growth Stock originally appeared on Fool.com and is written by Zachary Scheidt.
Zachary Scheidt has no position in any stocks mentioned. The Motley Fool owns shares of Apache. Zachary is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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