Two Energy Plays Stay Attractive

 | Sep 23, 2013 | 11:00 AM EDT
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Domestic energy production continues to grow at an impressive rate, even after six years of already significant production growth. Crude oil production increased by almost 800,000 barrels a day in 2012 over 2011 levels. This is the largest increase in crude oil since commercial production started in the U.S. in 1859.

The U.S. Energy Information Administration forecasts this will be surpassed in 2013, with another increase of at least 800,000 barrels a day. Moreover, the EIA predicts that the country will be producing just under 8 million barrels a day of crude by the end of 2014, which would be the highest level of overall domestic production since 1988.

As the shale technology pioneered in the Bakken region continues to be perfected and utilized to unlock energy resources in other shale formations throughout the country, I believe that domestic energy production is on an uptrend that will last years if not a decade or more.

Given this outlook, I have been and will continue to be heavily invested in the small-cap and midsized domestic exploration and production companies that are leading the charge of U.S. energy independence. Here are two plays that I hold that look attractive, despite recent rises in their stock prices.

Oasis Petroleum (OAS) is an independent exploration and production company with oil and natural gas resources in the Montana and North Dakota regions of the Williston Basin. The shares are up some 40% since I highlighted the company in February but still look attractive.

Revenue growth is tracking to better than 65%, and that was before it picked up an additional 160,000 acres in the Bakken shale region recently for $1.5 billion. This transaction was applauded by analysts and sent the shares significantly higher.

The company is also tracking to almost double its earnings per share this fiscal year to $2.75. Consensus earnings estimates for 2014 are calling for about a 25% bump in earnings to $3.40 per share, and that was before the recent Bakken transaction.

Operating cash flow has grown more than 1,000% since the end of 2010, and the stock has minuscule five-year projected price/earnings/growth ratio of 0.51. Despite significant earnings and revenue growth, the shares sell for just over 12x forward earnings projections, a deep discount to its five-year average of 22.6.

Newfield Exploration Company (NFX) is an independent energy company that produces natural gas, oil and other liquids. Its main properties include acreage in the Rocky Mountains, Mid-Continent, Malaysia and offshore China. The stock is up more than 30% since it bottomed in April, but is still down some 40% from its highs in 2012.

Newfield is more of transformation play than a pure production growth investment like Oasis. Like Apache (APA), it is shedding overseas assets to concentrate on growing production as its promising domestic fields. Its proposed sale of some of its China and Malaysian assets has attracted significant interest and that should fetch at least $1.5 billion.

These sales will allow the company to pay down debt and accelerate investment in its fields in North Dakota, Texas, Utah and Oklahoma, where it has experienced strong returns on capital. The company also shows traction getting more of its production from oils and liquids rather than natural gas. Its overreliance on natural gas was what triggered its substantial stock decline in 2012.

Using this strategy, the company should experience production increases in its domestic acreage in the teens, on average, over the next few years. The stock is not expensive at just over 12x forward projected earnings and a little over 20% above book value.

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