Discounted Energy Buys Look Good for Long Term

 | Dec 24, 2013 | 7:00 AM EST
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Yesterday I wrote about analyzing the world by looking around and today I want to continue that theme. I'm spending the holidays in one of my favorite towns in the world, Rockport, Texas. We're on the Gulf of Mexico, northeast of Corpus Christi and southwest of Houston. Driving around town it becomes obvious there is no recession talk in these parts and in fact the economy is robust.

Both offshore drilling and unconventional onshore projects have had a meaningful impact on employment rates and housing prices in this region. Driving through Houston the robustness of the economy leaps out at you. This is an unabashedly capitalist region and business is good. The non-seasonally adjusted unemployment rate in Houston is below 6% as is the Dallas region and it is largely because of oil and gas.

I am told that the other large unconventional oil fields are seeing the same type of economic growth and strong jobs situation. I know that we have done very well with the small banks we have owned in the Marcellus and Bakken shale regions as they have seen strong deposit and loan growth in stark contrast to banks in other parts of the U.S.

The unconventional energy industry and its supply chain is estimated to support more than two million jobs in the U.S. Imagine where the unemployment rate would be if we decided to halt fracking and other forms of energy extraction domestically.

It is not just jobs created in the shale regions that are adding a boost to the economy either. I have seen estimates that the cheap energy supplied by the large supply of natural gas and other fuel sources saves the average household more than $1,200 annually. Think what fuel bills would be like in the Midwest and northeast sections of the country after the recent cold snaps and early snowstorms without cheap fossil fuels right now.

Green energy advocates would like us to abandon oil and gas, especially fracking, but the simple truth is that we simply cannot afford to do so. Oil, gas and our search for energy independence will be the largest part of our energy solutions for many decades still to come.

This is a very investable idea. Many of the oil and gas companies are still very cheap on an asset basis. I have owned and advocate for companies like WPX Energy (WPX) and Swift Energy (SFY). Both trade well below book value and have put together solid asset portfolios in the Eagle Ford Shale regions.

WPX Energy trades at 80% of book value while Swift Energy is one of the cheapest stocks on the board at just 55% of book value right now. I own both and expect to see several multiples of the current prices at some point in the not too distant future.

I have owned shares of other oil and gas exploration companies like Rowan (RDC) and Nabors (NBR) for a very long  time with favorable results. The value of the companies has gone up each year so they still trade below book value and could be bargains for long term investors especially on a pullback. Key Energy Services (KEG) is an onshore rig based drill servicing company that is trading below book value and could see a huge boom in revenue and earnings as drilling activity picks up over the next few years.

As you dig through the exploration and production business as well as oil service companies there are still plenty of safe and cheap investment opportunities for patient long term investors.

I am not really a thematic investor when it comes to the broader market. However when I look at my nonbank stock portfolio right now I see a lot of energy related stocks along with other energy related resources like coal.

The simple truth is that the path to prosperity is greased with cheap energy and eventually we will pull back for the expensive mandates of politically popular but expensive alternative energy sources and focus on the dirty stuff we dig out of the ground to provide stimulus to the economy and the potential for energy independence.

Investors who buy the oil and gas stocks that trade right now for large discounts to their asset value should do very well over the next decade as energy policy shifts in the direction of unconventional oil and gas productions.

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