3 Solid Paths to Energy Profits
For the past year, crude oil prices have generally traded in a band between about $85 per barrel on the low side and approaching $100 on the high side. Barring major economic or geopolitical disruptions, it appears safe to assume that black gold is unlikely to stray far from that range for the remainder of 2013.
Oil and gas producers cherish that sort of stability as they plan for their future exploration and production activities. For that reason, among others, I continue to believe that the energy sector will remain one of the more attractive groups during this year and beyond. As such, I have three especially solid energy companies that I believe Fools should consider carefully as they select the energy components of their investment portfolios.
Denbury Resources Plano, Texas-based Denbury represents a truly unique way to play the strength in the U.S. oil and gas markets. The company utilizes a process called carbon dioxide enhanced oil recovery (CO2 EOR), or tertiary recovery, to produce oil from wells that otherwise might have seen their last days. Through the process, carbon dioxide is injected under high pressure into the otherwise spent wells, thereby facilitating production of large percentages of the remaining oil.
The company generates its CO2 from several sources, including the largest reserves east of the Mississippi River and sizable positions in the Rocky Mountains. It also receives man-made carbon dioxide from an Air Products & Chemicals hydrogen plant at Port Arthur, Texas.
The expanding company, whose market capitalization sits just below $7 billion, increased the likelihood of future growth through a pair of recent transactions. In December Denbury sold Bakken assets to ExxonMobil for $1.3 billion. Denbury also received Exxon's interest in a pair of Texas and Wyoming fields and an interest in the larger company's CO2 reserves in yet another Wyoming field. It then purchased Cedar Creek Anticline properties in North Dakota and Montana from ConocoPhillips for just over $1 billion.
Denbury, whose operating margin approaches 43%, has seen its share price increase by 13% thus far this year.
Flotek Industries The smallest member of the trio, with a market cap of about $815 million, Flotek operates on the services side of the energy sector. As I've previously pointed out to Fools, it also constitutes a rare instance wherein the analysts who monitor the company all accord it strong buy ratings. But with Flotek's share price having risen by more than 40% year to date, it is difficult to contest that unanimous confidence.
Flotek operates in three distinct areas. Its chemicals and logistics division provides specialty chemicals used in the stimulation, cementing, and blending of oil and gas wells. The drilling products division designs and manufactures downhole tools for the energy, mining, and water industries. Its artificial lift unit supplies pumping system components, including pumps, separators, and valves.
Earlier this month, Flotek announced the planned acquisition of Florida Chemical Company, the world's largest processor of citrus oils. Consideration for the purchase will be $49.5 million in cash and nearly 3.3 million shares of Flotek common stock.
Whiting Petroleum Denver-based Whiting Petroleum is an independent oil and gas producer with operations totally within the U.S. It's exploration and production activities occur in the Rocky Mountain Permian Basin, Mid-Continent, Gulf Coast, and Michigan regions. Oil constitutes 80% of the company's production, with 70% of that emanating from the prolific Bakken formation.
As my Foolish colleague Tyler Crowe told you last week, the U.S. Geological Survey has recently more than doubled its absurdly conservative 3.5 billion barrel estimate of recoverable oil in the Bakken. Nevertheless, some analysts and industry types believe that the USGS is still being overly cautious. There are those who peg the real recoverable barrels number for the formation nearer to 20 billion.
Analysts who follow Whiting have accorded its shares a mean target price of $60, or 31% above their Thursday close. The shares trade at just 11 times projected earnings for 2014, and the company's enterprise value to EBITDA is less than 5.0 times. On Friday, SunTrust upgraded Whiting's shares to a buy rating from neutral. That followed similar upgrades by other firms during the past few months.
Looking for information on a larger cap energy company? Think about Halliburton. Domestic oil and gas service companies have taken a hit due to a slowdown in the natural gas drilling boom of the last couple of years. As this market looks to rebound, investors would be wise to consider Halliburton, one of the top companies in the business and one of those most in tune with the domestic market. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.
The article 3 Solid Paths to Energy Profits originally appeared on Fool.com.Motley Fool contributor David Smith owns shares of Denbury Resources. The Motley Fool owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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