2 Stocks for a Bullish Surprise

06/30/2011 8:30 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

The crisis in Greece won't effect the growth in the energy sector, notes Elliott Gue of The Energy Strategist.

Recent data suggests that the US economy may be emerging from its recent soft patch.

The Citigroup US Economic Surprise Index compares the consensus estimate for key economic data to the actual figures. Negative numbers indicate that economic data has consistently come in below expectations.

Data came in well under consensus outlooks starting in April, when the index plummeted to a multi-year low. But last week, US economic data—including jobless claims and retail sales—largely beat the consensus expectations.

Although it’s too early to claim definitively that the US economy has turned the corner, this could be the first sign that supply-chain disruption stemming from the earthquake in Japan’s Tohoku region have begun to abate. Lower oil prices should also provide some relief to US consumers.

Regardless of whether this improvement proves durable, the data suggests that the US economy isn’t at risk of slipping into a recession.

The latest summer swoon should follow the pattern established in 2010. Expect concerns about the EU sovereign-debt crisis and a US economic slowdown to fade as the summer progresses.

Meanwhile, the ongoing correction in the stock market offers investors a great opportunity to buy our favorite energy stocks at attractive prices.

Dresser Rand Group (DRC)
This company is among the largest global suppliers of turbines, compressors, and other high-speed rotating equipment, primarily to the oil, natural gas, and petrochemical industries.

The company’s products are key components in all three segments of the energy patch: upstream (exploration and production), midstream (pipelines and storage facilities), and downstream (refining and marketing). For example, oil production ceases if a compressor stops pumping gas into a well, while a failed compressor will prevent a pipeline from transporting natural gas.

Over the past decade, management has reoriented Dresser Rand’s business strategy to better reflect the growing importance of national oil companies and rising demand for energy infrastructure in emerging markets such as offshore Brazil and West Africa.

In recent years, the company has courted business in the environment-services sphere, including waste-to-energy solutions, wind energy, energy storage, and clean coal. Management has assured investors that many of its opportunities in this space don’t depend on government subsidies.

With exposure to attractive growth markets, and an order backlog that suggests 2012 could be a record year for sales, Dresser Rand rates a buy up to $55. [The stock is getting pretty close, closing above $53 on Wednesday—Editor.]

Eagle Rock Energy Partners LP (EROC)
This master limited partnership (MLP) operates two businesses: gathering and processing (G&P) and upstream.

Upstream operations involve the production of crude oil, natural gas, and natural-gas liquids (NGL) from the partnership’s properties in Texas and southern Alabama. In 2010, Eagle Rock Energy produced slightly more than 5,000 barrels of oil equivalent per day (boepd) from 273 operated wells and 137 non-operated wells in which the MLP owns an interest.

Management has also stepped up its hedging program to lock in favorable market prices for oil, NGLs, and natural gas. The partnership has hedged 80% of its 2011 natural-gas production and 69% of its liquids output. For 2012, about 70% of the firm’s natural gas and liquids production has been hedged.

Based on the recent acquisitions and growth in midstream volumes, Eagle Rock Energy expects to boost its distribution to an annualized rate of 75 cents by the end of the second quarter and $1 per unit by the end of 2012—a substantial increase from the current annualized payout of 60 cents.

Improving fundamentals and a growing distribution make Eagle Rock Energy a buy under $12. [It closed around $11.25 yesterday—Editor.]

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