Exploring a Pair of E&P Stocks

 | Jun 29, 2012 | 2:00 PM EDT
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Following up on Thursday's theme, quarter-end "window dressing" is an ideal time to pick up stocks in beaten-down sectors, as managers are forced to dump those names to avoid having "losers" on their statements to clients. One of the worst-performing sectors for the second quarter was oil & gas producers. Here are two cheap exploration & production names that should bounce back in the coming quarter and offer patient investors long-term value.

Occidental Petroleum (OXY) is one of the largest domestic oil & gas producers outside the big two, Exxon Mobil (XOM) and Chevron (CVX), and has the same market cap as ConocoPhillips (COP).

Four reasons OXY offer great value at around $84 a share:

  • The stock yields 2.7% and, more importantly, has been raising its dividend payout at a 16% annual clip.
  • It has a solid "A"-rated balance sheet with little debt, which gives it financial flexibility to pick up assets on the cheap if the opportunity arises (e.g., the disposal of assets by troubled Chesapeake (CHK)). Also as importantly, 72% of its current production is oil & liquids, which currently have much better margins than natural gas.
  • The stock is selling in the bottom third of its five-year valuation range based on price/earnings, price/sales, price/cash flow and price/book ratios. The stock is selling at just over 9x earnings, a discount to its five-year average (12.7)
  • OXY has one of the best growth profiles of large-cap E&P concerns. The company is targeting 5% to 8% annual production growth for 2012 and 2013.

Rosetta Resources (ROSE) engages in the production of onshore oil and gas resources in the U.S. Its properties are located primarily in south Texas, including Eagle Ford, and in the Southern Alberta Basin in northwest Montana.

Four reasons ROSE has significant upside from $35 a share:

  • Revenue is growing at a very brisk pace at Rosetta. Analysts see sales increasing more than 30% for both 2012 and 2013. It also has a very low five-year projected price/earnings/growth ratio (0.54).
  • The stock is trading at just over 7x forward earnings, a huge discount to its five-year average (20.1). The company is projected to go to $4.65 a share in earnings in 2013 from $1.91 a share in 2011.
  • ROSE is way below analysts' price targets. The median price target for 19 analysts that cover the stock is $57 a share.
  • The stock has technical support at this price level and bounced from this price last year (see chart).

Source: Yahoo!

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