Energy Bargains Take Hard Drilling

 | Dec 12, 2013 | 4:00 PM EST  | Comments
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Stock quotes in this article:

atw

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unt

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arp

The market has had an impressive rally throughout 2013 even taking into consideration Wednesday's significant decline. Finding bargains in the market right now after this huge rise is akin to being a department store shopper the day after Black Friday. Most of the good stuff is gone and everything else has been picked over.

There are still some investment values left, however, if one is willing to put in the work. Following up from my column Tuesday, I still see reasonable valuations across myriad firms within the energy sector.

Here are a few more attractive energy concerns that are currently on my radar.

Atwood Oceanics (ATW) is an offshore drilling contractor that engages in the drilling and completion of exploratory and developmental oil and gas wells. The company owns a fleet of 10 mobile offshore drilling units with several more under construction. The stock has pulled back recently on concerns and differing views on rig utilization in future years.

This equity is extremely cheap, however, at below 6.5x forward earnings. Revenue should post a 20% gain this fiscal year which should accelerate to 25% in FY2014 as new rigs come online. I agree with the company's strategy of increasing its exposure to high specification rigs and also to becoming a bigger player in the Gulf of Mexico. Concerns about future demand seem more than fully priced into the stock and the company has also beat bottom line earnings expectations for seven straight quarters.

Unit Corporation (UNT) is not cheap on a strictly price-to-earnings ratio basis, where it trades at more than 12x forward earnings. However, it trades at just 5x earnings before interest, taxes, depreciation and amortization, which is cheap for what is primarily an exploration and production concern.

What makes Unit interesting from an investment perspective is that it has a significant and fast-growing midstream business. More importantly, the company has drawn the interest of activist New Mountain which has accumulated more than a five-percent stake.

New Mountain is pushing Unit to spin off its midstream operations as a Master Limited Partnership. This would be a smart strategic move.  As a standalone entity Unit's midstream assets would garner a value much higher than they are being given within their current structure.  Based on valuations on other midstream MLPs with similar profiles, these midstream assets could be worth twice what they are currently being valued.

Speaking of energy partnerships, I continue to like the prospects for Atlas Resource Partners (ARP) which is a part of my income portfolio. Atlas is a limited partnership active in oil-and-gas production in the Barnett Shale in Texas, the Appalachian Basin and in the Mississippi Lime region in Oklahoma.

This partnership currently pays a generous distribution yield of over 11%. Atlas has increased distribution payouts by a total of 40% cumulatively since coming public in 2012. The entity is growing rapidly via production increases and acquisitions. Atlas should clock in with over 80% revenue growth this year with an additional 50% gain in FY2014. Forward production is well hedged.

Atlas has also drawn the attention of noted value investor Leon Cooperman who has amassed an over 10% position in the company. Insiders also have a substantial stake in the partnership and added more than $1.5 million worth of new shares at slightly higher prices in June.

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