Energy Guru's Top Picks

11/07/2014 10:00 am EST

Focus: STOCKS

With energy prices down sharply, Robert Rapier suggests it’s now time for investors to become greedy. The editor of the Energy Strategist at Investing Daily discusses the outlook for oil and natural gas and highlights his favorite stock ideas in these beaten down sectors.

Steven Halpern:  Our guest today is energy sector expert, Robert Rapier, editor of the Energy Strategist at Investing Daily.  How are you doing today, Robert?

Robert Rapier:  I’m doing great Steve.  How are you?

Steven Halpern:  Very good.  Thank you so much for joining us.  You begin your latest research report by quoting Warren Buffett who said, “Be greedy when others are fearful.”  Does that suggest to you that now may be the time for investors to consider being a little bit greedy in terms of the energy markets?

Robert Rapier:  Absolutely.  I mean, I started out this year feeling like oil prices were a little bit blatant and one of my predictions for this year was oil prices would trade down and so, I was a little bit cautious in the first half of the year, especially with the high flyers and highly leveraged companies.

Right now, they have been so significantly de-risked that I think there is a very good opportunity in some of these companies.  Some of them that I would trust for that—I just thought they were trading at too high of multiples—have had their values, some of them cut in half, and I think right now they’re very compelling.  

Investing for me is about downside risk and upside potential.  Right now, I think that equation has been flipped around where, earlier in the year, I thought the upside was limited on some of these companies with significant downside risk.  I think the opposite is true now.

Steven Halpern:  Now, one of the questions that has been in the headlines almost every day now, but there’s been little discussion regarding natural gas, which is another market that you follow closely.  Could you update our listeners on what you see happening there?

Robert Rapier:  Yes.  Last winter, we had the largest draw on natural gas stocks ever, and so, we ended the winter in very bad shape with regard to natural gas inventory and so, again, playing odds, the odds were if we had an all summer or a hot summer, it was going to be very hard to refill those inventories by fall and so, my prediction again in January, is natural gas prices would trade higher this year, and actually, it may not seem like it, but they have.  

If you look year over year, they’ve been higher nearly all year because of the lower inventories; however, we had a much milder summer than normal and so the electric utilities didn’t draw on natural gas as much as they would in a normal year and so inventories have been largely refilled.  

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We refill them during the summer months and then we deplete them during the winter months and we’re still below normal, and we’re going into withdrawal season here in a couple or three weeks, we’ll start to pull out instead of put into the inventory, and right now, gas prices are going to be a function of how cold the winter is, whereas back in the spring, I thought the odds were they were going to be drifting a little bit higher, and they did, but they aren’t high.  

Right now they are, I don’t know, $3.50, $3.60.  If we have a warm winter, we could see natural gas prices pushing on down to $3 by the spring, but if we have another cold winter, it’ll be like last winter.  

We’ll see prices spiking up, but, again, it’s not a sure thing that it was spring, or I thought it’s probably a 70% chance we see higher natural gas prices, in the off-chance we have a mild summer, we could see prices kind of moderate, which is what happened.

Steven Halpern:  Turning to some individual stocks, you said that Oasis Petroleum (OAS) is really cheap right now.  What’s the attraction you see there?

Robert Rapier:  Okay, so I run a number of stock screens where I’m trying to seek out companies that are outperforming their peers on profit margin, return on equity, and revenue growth, but that are trading at lower multiples than their peers, and Oasis is one of these, it’s a leverage company.

Earlier in the year, I was scared to touch Oasis.  I felt like it was pretty recently valued, and if oil prices had hung in where they were, it would have continued to do well.  I just felt like the downside risk was significant.  Oasis has shaved about 50% off during this recent correction and right now they’re on top of my stock screen.  

The company has done very well growing production and growing revenues, growing income, so when oil prices hit bottom, you’ll see a company like that come down pretty sharply, but the company’s been significantly de-risked now. It’s at a price that I would buy that company today.

Steven Halpern:  Now, you also see opportunity at EOG Resources (EOG), which is a well-known large-cap company.  Could you share your thoughts on that?

Robert Rapier:  Sure, so EOG is the largest oil producer, Eagle Ford as well as the whole state of Texas.  They’re a bit lower risk than Oasis, but they still, I still felt like they were a bit richly valued for my taste over the past year.  

They’ve shaved off like 20%, or something, I think, since summer and so they’ve been de-risked, somewhat.  They’re still a little more expensive than what I would pay.  I wouldn’t be a buyer of EOG today for my personal portfolio, whereas I’m pretty risk adverse, but I would buy Oasis today because I just think the upside/downside potential and stuff is really skewed in favor of upside.  

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EOG, I’d like to see them get a little bit cheaper, but I think they represent a pretty good value at this level if you’re a long hold, buy and hold investor, but if you’re a trader, I’d try to get them for a little bit cheaper than they are now.

Steven Halpern:  Now, what are your thoughts on ConocoPhillips (COP), another stock that you’ve recently highlighted?

Robert Rapier:  Right, so I worked for ConocoPhillips for a number of years and we made a number of missteps while I was there.  One of them was we bought Burlington Resources at the height of natural gas prices and the stock underperformed peers, like Chevron, Exxon Mobil, for years, but in recent years, ConocoPhillips has made a big turnaround.  

They spun off their refining arm in Phillips 66, which is itself doing very well, and they have become the world’s largest independent oil and gas exploration production company.  They’re globally diversified, but they’re a major player in the Shell formations in the US, so earnings just came out today.  They were very good.  

Eagle Ford and Bakken production increased by 33% over a year ago and the company is yielding 4.2%.  This is one which conservative investors could buy and keep in their portfolio for the next ten years, and I wouldn’t worry about that, and I’ve held them for the last ten years.

Steven Halpern:  Now, finally, you note that some bargains have been created in the energy sector that even suggests that the companies could be snapped up by larger funds.  Perhaps you’d be kind enough to highlight a name or two briefly for our listeners?

Robert Rapier:  Sure.  I think that two of the three that I just mentioned.  I think Oasis and EOG both could be takeover targets.  EOG would need to be swallowed up by somebody like a Chevron or ExxonMobil who doesn’t have a lot of core shale play acreage.  By buying somebody like EOG, they could make a major step right into the shale boom for the next round in the next few innings of the shale gas boom and oil boom.  

Pioneer Natural Resources (PXD), they’re a key player in a premium base and they could be a target.  Companies with weak balance sheets, Laredo Petroleum (LPI), they’ve got some key acreage in the Permian Basin, but these low oil prices are going to stress them a lot, and so, companies that look cheap to an investor like me, like Oasis, that has to catch the attention of some of the major oil companies.  They can get it at a 50% discount relative to what it was six months ago and get some really key acreage and some prime real estate in the shale boom.

Steven Halpern:  Well, we really appreciate you taking the time to join us.  Thank you so much.

Robert Rapier:  Absolutely.  Anytime.

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