Spear Targets Energy
07/08/2005 12:00 am EST
"We recommend that investors now begin to overweight the energy sector in their portfolios as a long-term play on a secular bull market in fossil fuels," says Gregory Spear, whose Spear Report is one of the most well-rounded and consistently excellent services available.
"Our favorite energy plays are the actual exploration and production companies that own the fruits of their labor, not the contract drillers or oil service companies. We prefer geographically diversified mid-cap and large-cap companies with pricing power, strong cash flow, and the ability to increase dividends and buybacks.
"Apache (APA NYSE) is an oil and gas exploration company unlike any other. The company is highly oriented to growth, yet it only buys assets, not companies, so it is able to maintain a strong, clean balance sheet and a corporate culture that is uniquely focused on creating shareholder value. Apache has the most comprehensive and effective stock compensation incentives we have ever heard of. Every employee is a shareholder and 90% of stock option compensation is paid to non-executives. Specific targets for the share price are set years in advance and the entire team gets focused on the goal. Currently the target is a doubling in price by 2008. Could you live with that? We recommend subscribers jump in now and hold for three years.
"Burlington Resources (BR NYSE) is one of the world's largest independent oil and natural gas exploration and production companies. The company generates about 85% of its production from North American assets, with approximately one-third of that coming from Canadian developments. At the end of 2004, Burlington had a reserve base of 12 trillion cubic feet equivalent of natural gas. The company is cash rich, with more than $2 billion in the bank. The company takes a conservative approach to investing. Even without being aggressive, BR is making money hand over fist. The stock is in the process of breaking out of a three-month base and this is an ideal time to acquire some shares for your retirement account."
"One way to increase well production is to hydraulically fracture the stone around the bottom of the well hole. Carbo Ceramics (CRR NYSE) makes a variety of ceramic materials called 'proppants' that have superior conductivity to sand and are used to fill these fractures. And the company has a history of remarkable successes, frequently increasing well production hundreds of percent. It is much cheaper to refracture an existing well than to drill a new one, so products like that of Carbo Ceramics are in high demand. Carbo is the industry leader, with an estimated 52% share of the ceramic proppant market. This stock is an excellent candidate for a 12-18 month hold period. We don't expect spectacular earnings-driven momentum, but CRR is a very solid company in a fast growing industry.
"Lufkin Industries (LUFK NASDAQ), founded in 1902, also makes products that help oil drillers and oil companies maximize production from existing wells. The company manufactures and services the ubiquitous freestanding reciprocal pumps and related equipment that are used to extract crude oil from wells. Lufkin's earnings grew 48% in 2004 despite soaring steel costs. The fact that the company was able to manage that challenge so well is impressive, to say the least. In the first quarter of 2005, Lufkin blew the doors off, earning 52 cents per share, versus 13 cents a year earlier. Revenue climbed 48% and backlog is at its highest level in more than a decade. We have a near-term technical target of $42 and a long-term target of $65."
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