Some Possible 2014 Energy Gushers

 | Jan 02, 2014 | 10:00 AM EST
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The energy sector was extremely kind to my portfolio especially in the exploration and production space during 2013. I had big gains from a couple of small Bakken energy producers with Triangle Petroleum (TPLM) and Abraxus Petroleum (AXAS). Oil service plays like Halliburton (HAL) also performed exceptionally.

The portfolio also benefitted from a large stake in Hess Corp. (HES). This mid-major underperformed the market significantly in 2012 but had a stellar 2013. Hess gained more than 60% as it streamlined its operations and executed much better over the past 12 months. I often find that stocks that are laggards one year can be market outperformers over the next 12 months.

This is the time I look for these laggards as possible turnarounds in the New Year. Here are a couple of attractive energy plays that significantly underperformed the market in 2013, but should have much brighter years in 2014.

Eagle Rock Energy Partners (EROC) is an entity in the energy pace that consists of an upstream and downstream business. This limited partnership has a challenging 2013, to say the least. It was forced to cut its distribution payout significantly during the year. The stock declined from a high of over $10 a share early in the year to end the year under $6 a year.

The partnership's prospects brightened considerably in December. The company announced it is selling the midstream part of its business to Regency Energy Partners (RGP) for $1.325B last week. This transaction is for the equivalent of over 60% of the partnership's enterprise value.

The deal has many transformative aspects to it. The divesture leaves the company completely focused on its upstream business. It will also eliminate most of Eagle Rock's debt and give it ammunition to pick up strategic acquisitions in the exploration and production space. Raymond James upgraded the shares after the transaction and I would expect other analysts to follow suit in the New Year.

The deal leaves Eagle Rock with a diversified base of oil and gas producing properties, including those in the Eagle Ford and Permian shale formations. The average reserve life of this acreage is over a dozen years. The partnership also pays a better than 10-percent distribution yield. I believe brighter times are ahead for Eagle Rock and I picked up a significant stake after the recent transaction was announced.

Calumet Specialty Product Partners (CLMT) has been a long-time core holding within my income portfolio mainly due to its large distribution yield (10.3%). The year 2013 was a forgettable one for this niche refiner. The stock dropped some 20% during what otherwise was a stellar year in the market.

Calumet was affect with some of the same headwinds most of the refiners hit in the middle of the year -- namely declining crack spreads and exploding costs to comply with biofuel and ethanol blending mandates.

The spread has recently widened, however, to more than $10/barrel between WTI and Brent since reaching parity this summer. In addition, the Environmental Protection Agency is easing these renewable mandates in 2014. This has already resulted in Calumet's renewable mandate costs falling by around two-thirds a barrel in the fourth quarter from the previous quarter.

Technically, the stock looks like it is putting in a bottom at current levels. Earnings should also bounce back in the New Year. After posting approximately a quarter a share in earnings in FY2013, Calumet is projected to earn around $1.70 a share in FY2014 according to the current consensus.

The stock market is a lot like the National Football League. Teams that were bottom dwellers the year before can rise up and win the division the next and vice versa. Followers of the Philadelphia Eagles and Houston Texans know firsthand of this phenomenon this year. I am hopeful that the selections profiled above can stage similar ascents in 2014.

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