Watch the Large Domestic Energy Firms

 | Dec 23, 2013 | 11:00 AM EST
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I spent part of the weekend reviewing my portfolio in between watching my fantasy football team go down to inglorious defeat in the championship game. I was looking for themes that worked in 2013, ones that did not do so well during the year and what trends should continue into the New Year.

One trend that that provided good returns was betting on mid-tier energy concerns that are working to become more streamlined and focused on growing production in geopolitical stable North American. These oil and gas producers are spinning off non-core assets such as refineries and gas stations as well as selling off some overseas properties. They are using the funds raised to pay down debt and invest in promising opportunities in the good old U.S.A.

Both Hess Corp. (HES) and to a lesser extent Occidental Petroleum (OXY) have used this playbook to reward their shareholders in 2013 as their stocks have reacted positively to these efforts. I believe this theme will continue to play out in 2014 and beyond.

One mid-major that was not rewarded for its efforts and significantly underperformed the market in 2013 is Apache (APA). Over 55% of its production now comes from North America which is up substantially from just one third four years ago. In addition, oils and liquids now make up 55% of overall production, up from under 50% in 2009.

The company sold some $7 billion in non-core assets in 2013. It paid down $2 billion in debt and is using the additional funds to fund North America production and stock repurchases. In its last reported quarter, North American production of oil and liquids rose 35% year over year.

Despite these achievements in 2013, the stock rose less than 10% for the year, substantially below the rise in the overall market. The stock sells for just over 10x this year's earnings and is priced at just over book value. I would look for the equity to make up for its underperformance in 2013 in the coming year.

Marathon Oil (MRO) is another mid-tier energy play that is in the midst of a transformation. The stock has had a good, but not great year, and lagged the overall market. Marathon was recently called out by Jim Cramer as 'undervalued'.

Marathon is lifting its rig count by 20% in the Bakken and the Eagle Ford shale formations and doubling their rig count in Oklahoma's Woodford shale play. It is financing this acceleration of North American production by selling off North Sea assets and also by cashing in a 10% stake in an Angolan field.

The company also spun off its refinery and other downstream assets in 2011. The shares are underpriced at below 5x trailing operating cash flow and the shares also pay a 2% dividend. The stock is offering a nice entry point after selling off some 10% in the past few weeks.

I continue to like what is happening with large domestic energy concerns. They are restructuring to ride the North American production boom, paring non-core operations and positioning themselves to greater reward shareholders in the coming years.

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