Three More Banks That Have an Energy Edge

 | Jan 17, 2013 | 1:30 PM EST
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On Wednesday I discussed stocks that combine two compelling trends: natural gas and regional and community banking. We looked at two banks that serve the booming region of the Bakken fields in North Dakota and Montana.  

Another area of the country where we can look to combine banks and energy is in the Northeast U.S. The Marcellus Shale field runs through much of the Appalachian Basin, which covers New York, Pennsylvania, Maryland and West Virginia. Right now, most of the drilling activity is in western Pennsylvania, but I expect that to change over the next decade as the importance of cheap natural gas becomes more clear.

The unconventional gas fields supply us with the fuel that provides a path to energy independence but solid long-term economic growth as well. There will be politics and discussions along the way, but ultimately there will be expanded exploration and production activity throughout the region.

All this activity is a huge plus for the local economies. Employees need to be hired. Trained oil and gas professionals will relocate to the area and make permanent homes in the region. Parts will and supplies will be purchased, as will homes, cars, groceries and all the other items needed to support a prosperous growing populace. This is fantastic news for the banks doing business in the Marcellus Shale region.

The economic story of the Marcellus Shale, because it is located in the populated Northeast and not the wilds of North Dakota and Montana, is better known to investors, and the bank stock prices reflect this knowledge. Many of the obvious plays in the region have seen their stock prices bid up to more than 1.5x book value and are just not sensible investments right now. Stocks such as FNB (FNB) and S&T (STBA) will undoubtedly see decent growth as a result of business activity in the region, but their stocks are not safe and cheap at the current time.

Northwest Bancshares (NWBI) has seen its stock price rise in the past few months and currently trades at 1.2x tangible book value. Northwest has 168 branches in the Marcellus region as well as 52 consumer finance offices. The bank is one of my past five-year conversion picks, and it completed a mutual-to-stock conversion back in 2009. As a result, it still has a substantial amount of excess capital and a tangible-equity-to-assets ratio of more than 14.

Northwest has been deploying the cash to buy back shares and pay a dividend. In the third quarter alone, it repurchased more than 183,000 shares of common stock. Since the conversion, it has repurchased more than 15% of the outstanding shares, and it just raised its buyback authorization by more 5 million shares. Although I prefer to pay less than book value for banks, I believe you can buy a little of Northwest here and hope prices move lower in a market decline and allow you to scale in at lower prices.

I would take the same approach with another long-term favorite bank holding, Huntington Bancshares (HBAN). After buying this stock in the depths of the regional bank selloff in 2009 and 2010, I have a decent profit right now, but if I did not own it already, I would be a buyer, even though the shares trade at 1.1x tangible book value. Again, I would buy a little and hope we get a decline in the markets, or perhaps a missed earnings number by the bank, that allows additional purchases at lower prices.

Huntington is very aware of the opportunities in the shale gas fields. A large swath of the Marcellus field is in its service area, as are the Utica Shale fields in Ohio. Huntington recently hired longtime energy bank exec Stephen Hoffman away from Bank of America (BAC) to expand its presence in the marketplace. This addition of energy-related banking to Huntington's already strong banking business is one reason I am convinced that Huntington will be a $25 stock again before too many years pass.

First Commonwealth Financial (FCF) is another familiar name that has a very strong presence in the Marcellus region. The shares trade at a little over tangible book at 1.2x, but First Commonwealth has adequate capital -- its tangible equity ratio is over 10 -- and the loan portfolio is solid. The nonperforming asset ratio is below 2 and has been steadily improving.

First Commonwealth has 122 branches in western Pennsylvania, and that gives it a huge presence in the Marcellus region. As energy drives the economic growth in the region, First Commonwealth is going to benefit. Given its market cap of about $725 million and it strong presence in the region, I would not be shocked if we saw a takeover offer from a bank that is looking to expand in the Marcellus region.

The larger population and close proximity of the Marcellus Shale field has attracted more attention to banks in the region. I believe that the way to play these is to buy a little of the ones mentioned and hope for a pullback. Of course, for those who are willing to do the legwork, several smaller banks in the region trade at attractive prices and could also provide large profit opportunities.

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