Stock of the Week

Energy stocks

February 27th 2018

Energy has gone through a tough 10 year stretch with the price of oil dropping from well over $100 a barrel to a low of $28 thanks to increase in US supply and production combined with less than stellar global demand. But oil has made an impressive rebound in the last two years doubling in price to a recent $62 a barrel, but oil and energy stocks remain under pressure. Energy only accounts for 6% of the S&P 500 and was the worst performing sector last year, the only sector in the red and is down 5% year to date. Energy's 5-year return is 0% and has only averaged 1% over the last 10 years, but the fundamentals are getting better and companies are more focused on capital returns after years of excessive capital spending.

For energy investments, the easiest places to look are the blue-chip dividend paying stocks. Exxon trades for 16 times earnings and yields 4%. Chevron (CVX) trades for 18 times earnings and yields 4%. Halliburton (HAL), recommended in Barron's, is expected to grow sales by 10%, earnings by 40% and trades for 14 times next year's earnings. The dividend is only 1.5%. Phillips 66 (PSX) trades for 12 times earnings and yields 3% and counts Warren Buffett has a major shareholder. International giant, British Petroleum (BP) trades for 14 times earnings and yields 6%. Saudi Arabia's state oil giant, Saudi Aramco is expected to come public sometime this year creating the biggest initial public offering ever with a market cap of at least a trillion dollars. Take that Apple.

In the small cap growth space, we highlighted a Chilean oil company, Geopark (GPRK) two weeks ago. There is no dividend, but Geopark is growing sales 30%, earnings are expected to jump five-fold, yet the stock only trades for 9 times earnings and 1.3 times sales. Geopark presented at an oil & gas investment conference in Dallas Texas last week. Besides outlining their growth prospects, the company compared its stock price to other oil stocks. Even after performing well in 2017, Geopark still trades at a significant discount to other oil stocks. Geopark's current market cap is equal to their already developed oil reserves. If you add in their proven undeveloped reserves minus their debt the stock would be worth $18 a share or 80% higher than current levels. If you add in their probable oil reserves and possible oil reserves, the stock would be worth between $29 to $44 a share or three to four times' current levels. Maybe all their prospects won't work out, but there seems to be a lot of upside value to Geopark's stock if management continues to execute the way they have the last several years.

Energy should be a good sector for 2018 thanks to improving fundamentals and below market valuations. Higher interest rates and inflations should not hurt the energy stocks. In fact, energy is creating some of the inflation. In a market with a lot of overvalued or fully evaluated stocks, energy stocks should be looking good come year end.