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A Cheat Sheet for the Cheapest Energy Stocks

By Matt Badiali, editor, S&A Resource Report
Wednesday, March 16, 2011

The Oil and Gas Investor just handed out a cheat sheet for finding the cheapest oil and gas stocks out there... if you knew what you were looking at.
The leading industry journal just published a "lending scenario." It looked at 41 banks that lend money to the oil and gas industry and crunched the numbers. It found that, on average, banks are willing to lend energy companies $100 million to buy other companies with 7 million barrels of reserves. That works out to $14.28 per barrel.
That gives us a great benchmark to measure how cheap or expensive an oil company is. It's a better reflection of the deals going on in the energy market right now than just looking at public stock prices.
I'm not saying we should look for companies that are going to get bought out... But we sure don't want to buy a company at a premium to a reasonable takeover price. That's like paying more than the sticker price on a new car... It's just stupid.
With this in mind yesterday, I created a list of 105 U.S. and Canadian-listed energy companies between $500 million and $40 billion in market value and ran them against the lending scenario...
I only found FOUR companies that qualify as cheap right now... The recent climb in oil prices has made most stocks too expensive to safely buy.
And those four were cheap for a reason. They all had large warts on them. Take Harvest Natural Resources, for example. Ninety-one percent of the company's reserves are located in Venezuela. Venezuela is run by a private-property-hating madman. No thanks.
So does that mean there aren't any deals to be found in the energy sector? Absolutely not. You see, the lending scenario had me jump through an extra hurdle... It stipulated companies whose reserves were at least 60% oil and 40% or less natural gas. Because oil prices are high and natural gas prices are low, banks would rather lend money against companies with lots of oil reserves.
But investors should be looking for the exact opposite.
The best time to buy resource companies is when everyone hates the resource. The fact that banks only want oily companies is bullish for natural gas. The availability of bank loans has pushed the market toward oil. We'd rather buy what the market hasn't already fallen in love with... which is natural gas.
And if you throw out the 60% oil requirement, you suddenly find a ton of cheap, high-quality companies.
There are 30 oil and gas companies below the banks' $14.28 per barrel cutoff. And one of the first companies in that "cheap" pile that caught my eye was ConocoPhillips. It's well below the bank's cutoff price, at $13.05 per barrel.
ConocoPhillips' reserves are 56% oil and 44% natural gas. It's a giant integrated oil company, with $25 billion in earnings last year. But because it has a slightly higher ratio of natural gas to oil, it's selling at a discount to oilier companies. As natural gas prices rise, it will more than make up that discount.
That's true of a lot of good, small, natural-gas-heavy companies today. You may have to hold them for two or three years... but you could see huge gains over that period. I'm happy to wait that long for a 200% or 300% return.
Good investing,
Matt Badiali

Further Reading:

We have a tremendous amount of natural gas in America we aren't using right now. Even one of the richest oil moguls in the country thinks we're crazy for not taking advantage of the stuff... rather than paying billions of dollars for oil from foreign markets. And according to Matt, you'd be crazy not to hoard the stuff while you still can.
Take a look at Matt's natural gas series here, here, and here. Get the full story before America catches on to the enormous potential of natural gas.

In The Daily Crux
Market Notes
S&P 500 falls to lowest level since the first week of January.
Investors' preferred "safe haven"... Swiss Franc fund FXF hits all-time high as U.S. dollar fund UUP stays near multi-year lows.
Copper falls more than 10% in one month.
Plum Creek Timber and Weyerhaeuser avoid broad market selloff... lumber needed for Japan's rebuilding.
Market Watch
Symbol Price
S&P 500 1281.87 -1.1% +11.4%
Oil (USO) 39.39 -3.7% +1.4%
Gold (GLD) 136.27 -1.9% +25.8%
Silver (SLV) 33.61 -4.0% +100.8%
U.S. Dollar 76.37 -0.4% -4.8%
Euro 1.40 +0.0% +2.3%
Volatility (^VIX) 24.32 +15.1% +35.1%
Gold Stocks (^HUI) 534.57 -2.3% +29.0%
10-Year Yield 3.32 -0.9% -10.3%

World ETFs
Symbol Price
USA (SPY) 128.56 -1.2% +13.0%
Canada (EWC) 31.92 -1.6% +16.7%
Russia (TRF) 23.58 -1.5% +16.2%
India (IFN) 30.02 -1.2% +8.2%
Israel (ISL) 16.29 -1.2% +4.6%
Japan (EWJ) 10.03 -0.2% -1.5%
Singapore (EWS) 12.76 -3.1% +14.5%
Taiwan (EWT) 14.22 -2.3% +18.9%
S. Korea (EWY) 57.70 -1.8% +19.7%
S. Africa (EZA) 66.64 -4.3% +16.7%
China (FXI) 42.81 -1.7% +6.7%
Lat.America (ILF) 51.04 -1.1% +9.9%

Sector ETFs
Symbol Price
Oil Service (OIH) 154.69 -1.1% +25.2%
Big Pharma (PPH) 64.15 -1.3% +1.2%
Internet (HHH) 68.80 -1.5% +15.9%
Semis (PSI) 16.49 -0.9% +23.2%
Utilities (XLU) 31.48 -1.9% +8.6%
Defense (PPA) 19.59 -0.5% +7.6%
Nanotech (PXN) 9.25 -3.1% -9.6%
Alt. Energy (PBW) 10.15 +1.7% +2.1%
Water (PHO) 19.05 -1.1% +11.5%
Insurance (PIC) 16.37 -1.1% +12.1%
Biotech (PBE) 20.53 -1.3% +6.2%
Retail (PMR) 19.58 -0.1% +13.3%
Software (PSJ) 25.58 -1.4% +15.9%
Big Tech (QQQQ) 55.49 -1.4% +18.3%
Construction (PKB) 13.64 -0.7% +15.4%
Media (PBS) 14.57 -1.2% +13.6%
Consumer Svcs (IYC) 68.88 -0.9% +16.9%
Financials (IYF) 58.13 -1.2% +5.7%
Health Care (IYH) 67.04 -1.2% +3.0%
Industrials (IYJ) 67.86 -1.0% +21.2%
Basic Mat (IYM) 76.76 -0.3% +24.1%
Real Estate (IYR) 58.06 -0.8% +23.3%
Transportation (IYT) 91.10 -0.4% +17.6%
Telecom (IYZ) 22.58 -0.8% +18.0%

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