3 Energy Plays That Are Still Deals

05/31/2012 5:30 am EST


Curtis Hesler

Editor, Professional Timing Service

First natural gas began floundering, and now it looks like oil is also finding a floor, so it pays to be choosy when wading into the energy patch—because nowadays it's more like a minefield, writes Curtis Hesler of Professional Timing Service.

There is a divergence between energy issues and the price of crude of late, but not to the extent that we are seeing mining shares sink against gold bullion.

The reason for this disparity in the energy sector can be blamed on natural gas prices. Several of the companies on our list produce a good deal of natural gas and are being negatively impacted by those lower gas prices.

Enerplus (ERF) and Baytex Energy (BTE) are two examples. They will remain on a hold rating until we see some life in natural gas. Two others that are more directly involved with natural gas, National Fuel Gas (NFG) and Natural Gas Service Company (NGS), are similarly on hold until we see some technical evidence that gas is making a turn and we see some positive signals in our technical work.

I am very bullish on natural gas. But again, it will take a little time before we see this business blossom.

I can give you a simple technical handle if you wish. Watch the August 2012 natural gas future contract. You can follow it at www.barchart.com with the symbol NGQ12. August gas is currently selling just under $2.50 after bouncing off $2.17. I need to see this go over $3 to get my natural gas work on a positive bent, at which point we can address whether to buy those companies on hold, or perhaps new ones. In the meantime, hold your oil and gas stocks.

As for new issues on our recommended list, Suncor (SU) did reach our buy price of $30 in early April, and we are officially long at that price. The second stock we have been waiting to buy, Teekay LNG Partners (TGP), has refused to come back off to our price—at least so far. Keep your open orders in at $36 or better, and for clarity, disregard any previous recommendation to scale in.

Apache (APA) has been the only major oil company that I have liked for some time. I suspect the price is depressed here, due somewhat to worries about the turmoil in Egypt. It could be the volatility in the stock market that is worrying APA investors as well.

However, after push comes to shove, the Egyptians will desperately need Apache’s expertise. No one can do what they can do, especially in bringing worn-out fields to life. This is equally important to North American production, where there are plenty of worn-out fields to squeeze. Incidentally, they seem to be able to keep their production on the rise while other majors suffer declines.

Technically, Apache broke under $75 last October before recovering to $110 in March. They are correcting again, but there should be solid support at $85 if it manages to come that far off this time.

I continue to like this as a major producer and look for new highs—along with crude oil—over the next 18 months. Just be sure to keep purchases limited to $100 or less.

Two income stocks on our list continue to hold up quite well—Legacy Reserves (LGCY) and Linn Energy (LINE). Linn is pushing toward new highs, and it is time to just sit back and hold on to it for further gains. Thus, I am putting it officially on hold. Legacy is already on hold and should be kept as such.

These both have a bright future, but we need to see some corrective action before approaching them again. For new money, stick with Suncor at $30 and Teekay at $36.

This is a time to prepare for the future. It is not yesterday’s news or earnings that I am as interested in as tomorrow’s. The energy producers are going to be selling much higher when crude oil breaks to new highs.

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