The Energy Blues

 | Feb 21, 2013 | 3:00 PM EST  | Comments
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Stock quotes in this article:

wpx

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btu

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wmb

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apagf

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lnco

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linn

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bry

An observation I gleaned from my copy of Investor's Business Daily (IBD) is that energy stocks are still the unpopular cousin of the stock market. As was the case when I conducted this little exercise back in December, the energy space had more stocks with single-digit ratings for price and earnings momentum that the rest of the sectors combined. I know oil prices have been weak for the past few days and natural gas has corrected from its attempt to push higher last autumn, but many of these stocks are trading like no one will ever use the stuff again.

Let's take a look at the bigger energy picture. The world's economy will eventually recover and energy demand will rise again, spurring higher crude oil prices. Low natural gas prices and an abundant supply is going to cause the U.S. to look harder at using it to generate more electricity, power more plants and even run our automobiles, buses and trucks. Even coal will see increased demand despite ecological concerns. From a long-term point of view, energy demand will pick up and the companies that produce it will have far more value than is reflected in the current stock prices.

It is not just the smaller oil and gas companies that have seen their prices slip and their rankings in IBD fall into single-digit levels. Apache (APA) is one of the largest exploration and production companies in the U.S. and the stock price has fallen by more than 30% in the past year. For the first time in the last decade, you can now buy the stock at tangible book value in spite of a strong outlook for the company. They are feeling the pinch of lower natural gas prices, but they have made several smart acquisitions in the past few years that should lead to decent production increases. Apache is a premium asset at a bargain price and I think long-term investors can begin buying the stock now with hopes of adding more at lower prices during the next year.

One of today's stocks in the news is also a single-digit IBD stock with enormous long term potential. Linn Co. (LNCO) was formed last year to hold shares of Linn Energy (LINN) for investors who didn't want to deal with the tax structure of an MLP. Today the announced a $4 billion deal to acquire Berry Petroleum (BRY). The deal increases Linns oil exposure to 56% of production totals and raise total about by more than 30%. I would wait for the excitement generated by the deal to die down a bit but the shares have a generous yield of more than 7% and should trade higher with oil prices.

Trading at just 50% of tangible book value WPX Energy (WPX) is one of the cheapest oil and gas stocks so it is no surprise they have a low composite ranking. The company was spun off from Williams Companies (WMB) in 2011 and they had high legacy costs after the deal. Renegotiating midstream costs such as transportation and storage could cut as much as $200 million in costs over the next two years. They have a strong presence in most of the US unconventional shale gas fields including the Marcellus and Bakken fields. They also have a 60% stake in Apco Oil & Gas International (APAGF) an Argentina-based E&P company that is worth more than $250 million. Some analysts think WPX may sell that interest along with other noncore operations to concentrate on core oil and gas production in the US. At this level the stock is too cheap not to own for long term value investors.

Coal stocks are on the list of unloved and underperforming stocks as well. Arch Coal (ACI) is still a single-digit selection and at less than 60% of tangible book value is a buy. Peabody Energy (BTU) stubbornly refuses to decline below tangible book value but I am hopeful it will before the end of the year. If the market continues to weaken, I will be looking to sell the June $18 and $19 puts to create the stock below book value.

Energy stocks are unloved and underappreciated right now. Although the near-term outlook may be bumpy as concerns about global demand, excess natural gas and political issues create some volatility, the long-term outlook is pretty solid. At current prices, it is time to start buying energy.

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