If you are as bullish as I am about the energy sector, it makes sense to buy stock in companies throughout the entire value chain. The means buying stakes in upstream, midstream, downstream, and (we can’t forget) oil field services. Below, I review two stocks in different industries within the energy sector. My focus is on analyzing their strengths and weaknesses to assist the reader in making an informed investment decision.
Opportunities & Risks for Halliburton Company (NYSE:HAL)
Despite challenges from volatile guar gum prices and overcapacity in domestic driller, there exists a multitude of opportunities for Halliburton. The first one has essentially consistently been boosting its dividend distribution over more than the last six decades, and this is not expected to change any time soon. It is also encouraging to see that earnings per rig has been rising, even in North America. In 2008, the company earned $3.69 million for each rig, and this figure has since changed to $6.46 million.
Despite these opportunities Halliburton faces some threats. The first threat is the fierce competition that exists among oil field service companies. All the companies in the industry are pushing to pass on lower costs, which has devastated margins at a time when basins are being crowded and natural gas prices are low. Further, the company is exposed to unfavorable government regulations that can negatively affect the expansion of the company. I would argue, however, that much of the downside has been factored into the stock price, since Marcellus Shale production, for example, is only likely to go up from fracking bans being lifted.
Why You Should Buy Suncor Energy Inc. (USA) (NYSE:SU)
Suncor is a Canadian company specialized on the oil sands, which is facing pressure from excess supply. Management has helped reduce risk by providing a generous capital allocation policy. By the third quarter of 2012, the company had managed to repurchase shares worth $1.5 billion. Shortly after, the company announced that it was going to start another share repurchase program worth $1 billion. Dividends increased by 18% per share, and there is the expectations for more increases in the future.
At the same time, Suncor has been working towards reducing the cost of production and expand profit margins in the process. Management is pushing for an 8% annual growth rate until 2020. When you factor in dividend yields, this provides for a nice steady stream of appreciation and income support. The stock’s defensiveness is supported by rich reserves: The current deposits in the oil sand of Canada are estimated to have some trillion barrels of oil. With these kind of reserves, the company expects to continually produce oil for more than a hundred years. The readily available reserves enable the company to save money that could be used for exploration and instead invest in research and development in an effort to come up with more economic ways to extract oil and create value in the process.
Conclusion
Despite the bull run, Halliburton trades reasonably at a respective 14.7x and 10.3x past and forward earnings. Suncor is also reasonable at 9.7x forward earnings. I encourage backing these companies with a more stable producer, Schlumberger Limited. (NYSE:SLB) . It may trade at a premium 19.2x past earnings, but it is forecasted for 17.2% annual EPS growth over the next five years and is highly favored on the Street. The consensus rating is 1.7 out of 5 where 1 is a buy. This is one of the top ratings, and it is reinforced by a recent price target by HSBC Securities that is 25% above the prevailing price.
The article Consider Buying These Energy Players Despite Headwinds originally appeared on Fool.com and is written by David Gould.
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