Recognizing Energy Opportunities

 | May 20, 2013 | 10:00 AM EDT  | Comments
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Stock quotes in this article:

apa

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nbl

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apc

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xec

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cop

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cvx

It's been a tough year for all of the beta stocks -- particularly the energy shares. That's one of the reasons it has been so difficult to trade the energy sector in 2013. Value investing in energy is what I do -- what I most like to do is find shares of disliked stocks that are undervalued by the market and buy them.

But that's been a losing game this year, as anything without a dividend or other distribution has been lapped by just about anything that has had one. This "yield chase" has obviously not been restricted to the energy sector, but has kept high quality exploration-and-production (E&P) stocks such as Apache (APA), Noble (NBL), Anadarko (APC) and Cimarex Energy (XEC) in check, at least compared to the dividend deliverers including majors like Conoco (COP) and Chevron (CVX).

Yet there have been trading opportunities that are worth recognizing, as each of the "dividendless" oil companies has languished -- at various times and for various reasons -- this year. One of the sharpest examples of a great chance to pick up shares on the cheap has been Apache over the last three weeks. Right now, Cimerex is presenting an opportunity.

Apache has been one of the very interesting E&P companies over the last several years. However, its exposure to Egypt has kept the lid on this otherwise fairly well run oil company since the onset of the Arab Spring.  Further discoveries in Egypt that should have been positive for the company -- including a well with over 100 net feet of pay -- were seen as an additional increase of negative exposure in a dangerous area. Subsequently, shares of Apache slipped briefly under $70 a share, which is an insanely cheap valuation of production.

However, a minor beat along with a restructuring plan in the company's latest earnings report -- including plans of more than $4 billion of asset sales to buy down debt -- has boosted Apache shares north of $83 in only two weeks of trading. Although I have a target on Apache shares at $77, I missed this opportunity. If the shares trade at the level in any mini-swoon, I plan on diving in.

We shouldn't miss the opportunity forming in Cimerex, which is one of the least loved energy companies on the Street. It reported a small miss and has dropped almost 5% in value, but its production value in the Permian Basin continues to impress. I've been a big fan of the Permian, which has been perceived as a weak sister play as the "big boy" excitement has continued to overflow in the Bakken and Eagle Ford. But the Permian is showing itself to have a longer well cycle than even the Bakken. I believe committed E&Ps in the Permian basin will ultimately show better barrel-per-dollar investment there than most anywhere else.

And Cimerex is well positioned in the Permian Basin with good management. The stock's latest drop back down to $70 represents a relative value that I am excited about. Cimerex is a trading stock in my mind, not a long-term investment, so I'll be buying if the shares float lower. I will be looking to sell them if they suddenly levitate above $75.

Beta shares have been a tough play this year in energy, but I can't resist trying to buy value. Two of those values right now are in Apache and Cimarex, and both are worthy of a trading punt.

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