Upside's Energy Trio

08/13/2018 5:00 am EST

Focus: ENERGY

Richard Moroney

Editor, Dow Theory Forecasts

Energy stocks haven’t looked so attractive in years — and investors have taken notice. So far this year, the 89 energy stocks in the S&P 1500 have posted an average gain of 12.6% — well above the 7.6% of the average stock in the broad index, asserts Richard Moroney, editor of Upside Stocks.

Investors pin their hopes on an earnings boom, reflecting robust global demand that is expected to keep oil prices high despite rising inventories.

In the March quarter, energy companies reported the strongest growth of all 11 sectors in S&P 1500, boosting per-share earnings by an average of 55%. The group is expected to deliver the best growth for full-year 2018, with per-share earnings projected to surge 63% compared to 25% for the average stock in the S&P 1500.

Even factoring in this year’s expected growth, the sector is not cheap. Energy stocks trade at 23 times estimated current-year earnings, a 9% premium to the 10-year average. Still, there are pockets of reasonably valued names, with a compelling blend of strong operating momentum and reasonable valuations

Operating in the Permian Basin of Texas and New Mexico, Energen (EGN) is benefiting from acquisitions, improved operating efficiencies, and a higher well count. The company expects to drill nearly 130 wells this year and targets oil and natural gas production growth of 25%.

Energen boasts a strong balance sheet, reflected in a Financial Strength score of 92, providing flexibility to pursue growth opportunities. Shares have rallied 29% this year, fueled partly by news that activist investor Carl Icahn has raised his ownership stake to nearly 8%.

In recent months, Icahn said he may be interested in acquiring Energen or finding a strategic buyer. For the June quarter, the consensus projects Energen will report earnings of $0.75 per share, compared to $0.06 a year earlier. Energen, scheduled to announce results on Aug. 7, is a Buy.

Gulfport Energy (GPOR) offers strong operating momentum and a reasonable valuation. Operating roughly 215,000 acres in the Utica shale region of Ohio and 93,000 acres in Oklahoma, Gulfport’s ample cash flow helps drive growth and capital spending.

Over the last 12 months, cash flow from operations nearly doubled to $764 million. The stock earns an Overall score of 95 and Value rank of 97, versus respective industry-group averages of 69 and 57.

In the June quarter, Gulfport Energy reported per-share earnings of $0.33, matching the prior year and a penny above the consensus. Revenue jumped 25% to $323 million, versus expectations of $332 million.

]During the quarter, net production volumes of natural gas and oil increased 28%, reflecting solid growth in the company’s Utica shale operations. Gulfport, with a Value score of 97, is rated Buy.

A new pick this month, Newfield Exploration (NFX) operates in highgrowth regions in Oklahoma, North Dakota, and Utah. The company, with proved reserves of roughly 680 million barrels of oil, also operates offshore China.

Newfield is investing for growth. Capital spending is expected to reach $1.3 billion this year, with nearly 80% earmarked for the burgeoning Anadarko basin. With a market capitalization of $5.7 billion, the stock is larger than our typical new recommendation.

In the June quarter, adjusted per share earnings rose 119% to $0.92, outstripping the consensus of $0.82. Fueled by higher production and favorable prices, total revenue rose 69% to $679 million, sailing past the consensus of $607 million. Newfield is being initiated as a Buy.

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