Use Patience for Battered Resource Stocks

 | Mar 18, 2014 | 5:00 PM EDT
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I want to look today at the miners, diggers, transporters and drillers that have had a horrid start to the year, are down at least 20% in the last three months and trade below book value.

Energy-related stocks and miners have been crushed as the market moved higher, which is really a puzzle. If we are going to have the type of economic growth that justifies the market flirting with new highs, then eventually energy demand has to pick up. The demand for ores and metals should also see an increase in usage.

I am aware that excess supplies of things like iron ore and natural gas exist right now. But if you are taking a longer view of the situation, five years from now we should see an entirely different situation in these industries. That should lead to much higher stock prices.

The most battered stock during the last three months on my list of potential cheapies is Boardwalk Pipeline Partners (BWP). Yield-chasing investors had pushed that stock up above $30 a shares. Then the company announced that because of lower storage and transport rates they would slash the dividend to preserve capital. The yield chasers became the tax loss sellers and the stock has seen its price slashed by 48% in the past three months.

The stock is wildly out of favor as they have had to renew some contracts at lower rates. They have more contracts up for renewal later this year and it is highly likely that we will see the same result in renewal pricing. The dividend now is just 3.2% and it won't be raised anytime soon. MLP investors in search of income are not going to be piling back into Boardwalk shares anytime soon.

While the near term looks bleak, the long term is a lot more interesting. At the current price level the stock is trading at just 80% of tangible book value. They have some tremendous assets, including 14,195 miles of interconnected natural gas pipelines. These pipelines directly serve customers in 13 states and indirectly serve customers throughout the northeastern and southeastern U.S as well.

They also have underground storage caverns having aggregate capacity of approximately 207.0 billion cubic feet of working natural gas and 17.6 million barrels of natural gas liquids. You can buy these assets right now at a tremendous discount.

Investors are discounting the Tisch factor in the stock as well. The general partner at Boardwalk is Loews Corporation (L), which is controlled by the Tisch brothers. Loews owns more than 50% of Boardwalk and has committed to backing them financially and already extended a credit line of $300 million to fund growth plans and regular operations at the company.

I can't see the Tisch family allowing the value in the pipeline and storage company to evaporate much further. As natural gas becomes a large part of the U.S. energy independence story in the next decade, I see shares of Boardwalk Pipeline moving much higher.

The other stocks on the list are going to be familiar names for regular readers. Swift Energy (SFY) has not gotten its mix of natural gas, liquids and oil to the levels that Wall Street would like to see and the stock has been punished accordingly. The stock is incredibly cheap at less than 50% of tangible book value and they own some very attractive assets in the Eagle Ford shale field. The sale of their Louisiana assets should help fuel the expansion of activity in more attractive regions.

Hercules Offshore (HERO) is also on the list, with the stock down 24% and trading at just 87% of book value. The company provides shallow-water drilling and marine services to the oil and natural gas around the world. They own 38 jackup rigs and 19 liftboat vessels, as well as operating five liftboat vessels owned by third party.

Results for Hercules have been dampened by the same issues everyone else is facing in the industry. Insiders would seem to have a much greater faith in the future than the market as they have been heavy buyers of the stock in recent months.

Cliffs Natural Resources (CLF) is a company I have owned and written about many times. The iron ore and coal miner is seeing the worst of both worlds as iron ore and coal are just terrible businesses right now. An activist firm is launching a proxy fight at this company to try and unlock shareholder value and this could be a very interesting ride in 2014. Long term, I believe iron ore and coal both recover and we see a much higher stock price.

The remaining stocks are coal names. Although the negatives of the coal industry should be pretty well known by now, investors are overlooking the fact that coal will be the fastest growing fuel source between now and 2040. That's according to the International Energy Agency. The companies that survive the tough times and figure out how to export U.S. coal will see tremendous increases in their stock price. Stocks like Alpha Natural (ANR) and Walter Energy (WLT) have substantial risks to dodge during the next few years. If they figure it all out, the upside is substantial. Coal is for patient aggressive investors but it could be one of the best sectors over the next decade.

There has not been a lot of inventory creation in the coal market, but these stocks have fallen to the point that they are cheap. They look attractive at current levels.

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