Three Undervalued Energy Stocks

The energy patch has experienced a deep correction over the past two-and-a-half years with precipitous drops in crude oil, natural gas and related stock prices. While the commodity price, as well as the related oil stocks, have sharply rebounded off the lows, they are still well below their long-term trend line valuation. The large losses and fear of another move lower, has resulted in a number of stocks still selling at significant mis-valuations that we believe creates a compelling opportunity for those investors willing to look beyond the short-term headlines and trends. Three stocks that we find to be particularly interesting are Anadarko Petroleum , Apache and Noble Energy . All of these firms are following the industry playbook of cutting capital spending, reducing operating costs and refocusing their business prospects toward lower risk and onshore drilling opportunities in North America to survive and generate shareholder value. Each of these firms will be survivors of today's chaotic environment. In addition to being attractive based on their current normalized earnings power, each offers even greater upside based on large discoveries in the past few years that are not reflected in their current earnings power or asset values. As the discoveries are less interesting with $40 oil, the market has not given them much credit for their more recent finds. Most of the energy sector does not have this unique characteristic. We believe this undervalued base of assets will drive meaningful share price outperformance in the upcoming years as these resources are either developed or sold to larger industry players such as Exxon Mobil or Chevron for their future potential. The first company is Anadarko, which has a solid base of assets compromising over 3 billion barrels of oil equivalent reserves spread across the U.S. continent, Gulf of Mexico and a broad international footprint located throughout Africa and Latin America. However, Anadarko also has several other key assets that are undeveloped in the Gulf of Mexico and Africa. In the Gulf, the firm holds over 1 billion barrels of potential oil in the Shenandoah and Phobos projects. Moreover, in Africa, Anadarko has the potential to develop more than 75 trillion cubic feet of gas in Mozambique, Ghana and Algeria. These are massive resources that are not reflected in the stock price. Apache is a relative newcomer to this list. Up until the summer, the company reported a little over 2 billion in oil and natural gas reserves -- a large but known figure. However, with Apache's early September announcement of the Alpine High discovery in the U.S. Permian basin in Texas, investors' outlook on the asset value of the company has dramatically changed. Apache reported that the Alpine High asset holds 3 billion barrels of oil potential and 75 trillion cubic feet of gas. This is a major unexpected find in easy-to-develop and low cost land assets in Texas. We believe many of the larger global oil companies must have moved Apache to the top of a potential buyout candidate list after this disclosure. Our last undervalued candidate is Noble Energy. Investors have known for a long time about the hidden assets on the books, in particular in the Mediterranean Sea. Noble has a solid base of assets across North America in the Marcellus, Permian, Delaware, Wattenberg and Gulf of Mexico basins. Unfortunately, the company has yet to tap into its vast potential value in the Mediterranean Sea in the Leviathan and Tamar natural gas fields off of Israel. Political meddling has led to a delay in the development of these fields. However, natural gas should be flowing by 2020, driving upside value in the name as the company taps more than 23 trillion cubic feet of natural gas from these emerging startup wells. We realize investors have been cautious re-entering the energy patch, in particular around the more volatile independent crude oil and natural gas producers. However, this downturn also creates an opportunity to buy into three very asset-rich companies that will eventually generate outsized investment returns -- Anadarko, Apache and Noble.

Three Undervalued Energy Stocks

These three companies hold significant assets that the market has yet to fully value.

Columnist Conversation

Implied Volatility on Crude Exploding

Ulcer Index

The Market Doesn't Believe Musk

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.