Still Some Bargains in Energy

 | Dec 10, 2013 | 9:00 AM EST
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Finding bargains in this stock market is much harder than it was earlier in the year due to the impressive rally in equities throughout 2013. I still think the energy sector is a good place to troll for some undervalued names.

The energy production boom in this country continues unabated. Five years ago the country was producing just a little over two-thirds of the energy it consumed. Now that number is up to almost 90% and I believe we will continue to march to energy independence.

This is having impacts across a myriad of industries and economic impacts throughout the nation. I read with interest Dan Dicker's piece  last week. Dicker said that thanks to this energy boom our domestic oil prices are likely to remain at levels significantly under global oil prices for the foreseeable future.

Obviously, this would be greatly beneficial to the domestic refining sector which has had a nice run over the last few months as the price between WTI & Brent oil prices have diverged recently after reaching parity earlier in summer. This position was echoed yesterday by JP Morgan who upgraded major refiners Valero (VLO), HollyFrontier (HFC) and Marathon Petroleum (MPC).

I continue to like Valero, the largest North American refiner, as it is well positioned to continue to leverage low-cost input costs from the country's increasing oil bounty. Valero has a growing export business, pays a 2% dividend yield and is reasonably valued at 9x forward earnings.

I also have some smaller plays within the sector in my portfolio. Delek U.S. Holdings (DK) is a refiner I hold and still find attractive even after a solid rally over the last two months. Despite its recent rise, the stock is still down some 30% from its highs earlier in the year.

Delek was just upgraded to "Buy" from "Hold" Monday over at Deutsche Bank. The stock also recently crossed over its 200-day moving average for first time since early summer. The shares pay a 2.2% annual dividend but the company also issues frequent "special" dividends including another dime a share payout announced last week. Stock is a good value at approximately 6x FY2012's earnings.

I also added to my holdings in Memorial Production Partners (MEMP) Monday. This limited partnership produces oil and gas from a well-diversified set of long lived assets throughout the country. This entity has gotten numerous positive comments and upgrades from analysts recently. Oppenheimer, Wunderlich, MLV Capital and UBS all have issued positive views on Memorial over the last two months.

Memorial also provides a robust distribution yield of 11% and the company has raised its distribution payouts by 15% since it came public late in 2011. This entity is growing rapidly as it continues to pick up new acreage at reasonable prices. Revenues should grow around 90% this fiscal year and they should rise another 50% in 2014.

After basically breaking even in FY2012, Memorial is tracking to around $1.85 a share in stated earnings in FY2013. The stock at $20 a share is not expensive at just over 9x forward earnings. Memorial continues to be one of my favorite plays in the space.

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