Tapping In to Energy's Golden Era

At regular intervals, I reiterate an important tenet of growth investing: Finding a few large, long-term themes can do more to enhance your wealth than a thousand small trades. In the 1980s, all you had to do was bet on America's industrial restructuring. In the 1990s, all you needed to do was go long a basket of tech stocks and you would be (or are) retired now. This decade, one of the best long-term, gigantic themes is the U.S. energy revolution, enabled by the perfection of horizontal drilling and hydraulic fracturing techniques. I say perfected because these techniques were first developed in the 1950s, and investors were excited about shale plays as early as the 1960s, as I've noted here. So it took 50 years to work out -- just like the Internet, which was invented in the 1960s. Energy was left for dead after the 1990s shifted attention from oil to Internet. But, for the aforementioned reasons, the past decade has been a golden era for energy. The chart below shows the stunning outperformance of this sector against the S&P 500. XLE -- Daily Source: Yahoo! Finance View Chart » View in New Window » Importantly, while exploration techniques are now pretty advanced, we are only beginning to cash in on the implications of cheap domestic fossil fuels. Among other things, we're now looking at the prospect of natural gas-fueled engines, which T. Boone Pickens wants to enable with his Clean Energy Fuels (CLNE), as well as cheap feedstock that is enabling a competitive renaissance of the American chemical industry. All in all, in this sector, the next decade should be as interesting as the last had been. In order to keep tabs on the hottest names in the space, I'm currently attending the Global Hunter Securities' GHS 100 Energy Conference in Chicago, which started Tuesday and runs through today. This conference gathers 100 highly attractive names in the sector, spanning all levels of market capitalization and representing multiple subsectors, such as exploration-and-production and oilfield services. Global Hunter is a top-notch boutique broker that focuses on the space, and the firm has established itself with a combination of focus and great research. As readers will recall, I am a huge fan of boutique sector specialists, since they tend to be more connected and knowledgeable about their groups than are the large, highly diversified investment banks. GHS is one to which all energy-sector investors should pay attention. My only complaint: Their headquarters are in New Orleans, but they never host any of their conferences there! Of the many great names at the conference, here are three that tickled my fancy. Take my quick summary as a starting point, and do your homework before investing, as a quick appearance at a conference never constitutes enough due diligence for you to make an investment. Rather, you should view this exercise as building an attractive menu for further research. Abraxas Petroleum (AXAS) -- Abraxas is a small driller operating in the Eagle Ford shale in Texas. The stock is on fire, having risen 70% this year alone, and bringing Abraxas to an investable $500 million market cap. As the company accelerates its drilling program in the Eagle Ford, analysts are ratcheting up estimates, as new wells are demonstrating more than 40% internal rate of returns (IRRs) at current oil pricing. Abraxas has one rig operating, but expects to add a second next year. That should give good visibility to further upside potential. The company is expected to trade some Powder River Basin acreage for more land in Texas in order to consolidate efforts in three rich areas -- the Eagle Ford, Bakken and Niobrara shales. Abraxas Petroleum (AXAS) -- Daily Source: Yahoo! Finance View Chart » View in New Window » Abraxas Petroleum (AXAS) -- Stock vs. EPS Estimate Source: FactSet, using Thomson Reuters Estimates View Chart » View in New Window » Continental Resources (CLR) -- This company is a clear leader in the mid-cap energy segment due to its heavy Bakken exposure. (Yes, in energy, $27 billion is really just mid.) Continental is driving production technology, implementing testing on higher-density drilling (160-acre), and drilling at multiple levels in the Lower Three Forks area. The TF1, TF2 and TF3 benches all look productive, albeit at different performance levels. Continental is a leader in enhanced completion techniques, and its new designs are driving up to 30% improvements in initial production from slickwater fracking. Oil production appears set to grow between 20% and 30% over the next several years, setting up Continental as an impressive growth story worthy of a healthy price-to-earnings multiple. Continental Resources (CLR) -- Daily Source: Yahoo! Finance View Chart » View in New Window » Continental Resources (CLR) -- Stock vs. EPS Estimate Source: FactSet, using Thomson Reuters Estimates View Chart » View in New Window » Pioneer Energy Services (PES) -- Pioneer is a standard oilfield-services name, offering contract drilling in Texas, North Dakota, Utah and so on. The company is smaller, as it operates only 109 rigs and has a market cap of just $1 billion. It is a classic turnaround story: Falling estimates are turning into rising ones this year, and that has driven a huge run in the stock year-to-date. Drilling-services margins are improving rapidly as a higher utilization rate of 87% combines with better pricing of re-contracted rigs. Its production-services segment is also increasing capacity at better pricing. Refinanced debt has reduced interest expense and created financial flexibility for accelerating growth. Pioneer Energy Services (PES) -- Daily Source: Yahoo! Finance View Chart » View in New Window » Pioneer Energy Services (PES) -- Stock vs. EPS Estimate Source: FactSet, using Thomson Reuters Estimates View Chart » View in New Window »

Tapping In to Energy's Golden Era

These three names are well worth a look.

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