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oil rig energy platform (Jupiterimages/(C) 2007 Jupiterimages)
oil rig energy platform (Jupiterimages/(C) 2007 Jupiterimages)

TheStreet.com

Five best energy stocks for $100-plus oil Add to ...

A robust global recovery has some Wall Street analysts predicting crude oil will move past $100 (U.S.) per barrel in 2011. Energy stocks typically perform well at this stage in the economic cycle and the recent pullback, with S&P 500 oil-and-gas stocks flat last week, is creating a setup for those who want energy exposure.

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Large-cap oil-and-gas stocks have jumped an average of 5.7 per cent in the past four weeks, ranking as the best-performing industry group, as investors have rotated into equities poised to benefit from accelerating growth. By comparison, oil and gas was the fifth worst-performing industry group in 2010 and ranks as the third worst-performing group over a three-year period. Peak profits were achieved in 2008 when crude spiked to almost $150 a barrel shortly before the Great Recession took hold. Many large-cap energy stocks are still historically cheap.

Here is a closer look at the five highest-rated large-cap oil-and-gas stocks, based on analysts' aggregate reviews. Below, they are ordered by percentage of "buy" ratings, from plenty to most.

Of note: 58 per cent of crude-oil forecasters surveyed by Bloomberg expect a decline through Jan. 28, perhaps hurting oil-related stocks. The recent strength in these equities is a signal of longer-term prospects, but it's best to wait for a pullback in order to buy shares.

5. Chevron is the world's second-largest energy company, after fellow Dow component Exxon Mobil .

But, analysts favour Chevron's stock, which receives positive reviews from 76 per cent of researchers in coverage. In contrast, Exxon receives positive reviews from 42 per cent of analysts, ranking third-worst in the Dow. Chevron is scheduled to report fourth-quarter results on Jan. 28. Its third-quarter adjusted earnings tally of $1.87 (reflecting 8.7 per cent year-over-year growth) missed the consensus forecast of $2.15 by 13 per cent, sending shares down modestly. The sales figure, at $49-billion, missed by 1.9 per cent. Chevron has integrated global operations and sells at a peer discount.

Its stock trades at a trailing earnings multiple of 11, a forward earnings multiple of 8.9, a book value multiple of 1.8, a sales multiple of 1 and a cash flow multiple of 6.2, 43 per cent, 52 per cent, 58 per cent, 67 per cent and 32 per cent discounts to oil-and-gas industry averages. Based on forward earnings, Chevron is the fourth cheapest Dow stock. It also pays a 72-cent quarterly dividend, translating to a 3.1 per cent dividend yield, seventh highest in the Dow. It has boosted the payout 7.9 per cent a year, on average, over a three-year span and 10 per cent a year, on average, over a five-year span. Chevron has $15-billion of cash, compared to $11-billion of debt.

Bullish Scenario: Macquarie expects Chevron's stock to rise 21 per cent to $114 in 12 months.

Bearish Scenario: JPMorgan, despite rating Chevron "overweight", has a $90 target.

4. El Paso is a natural gas transmission, exploration and production company. It receives "buy" ratings from an impressive 80 per cent of analysts.

El Paso has significant interests in the 42,000-mile North American natural gas pipeline system, which will increase in importance in coming years as the U.S. segues from foreign-produced oil to domestically-abundant natural gas. El Paso has grown net income 7.2 per cent a year, on average, since 2007, but cut its dividend from a high of five cents in 2009, hurting its perception with investors. Currently, the company pays one cent a quarter, equaling an annual yield of 0.3 per cent. Analysts don't expect a near-term boost.

Still, El Paso is an attractive investment because it has pricing power over those who need to transport or store natural gas and has ample profit margins. In the third quarter, the gross margin jumped from 54 per cent to 64 per cent and the operating margin rose from 34 per cent to 44 per cent. In addition to its stable pipeline business, El Paso's exploration unit has interest in many of the so-called emerging shale plays in the U.S., including the Haynesville, Eagle Ford and Wolfcamp properties. JPMorgan, which rates El Paso "overweight", recently cut its 2011 natural gas price forecast to $4.35 per thousand cubic feet from $5.06 and its 12-month target for El Paso to $15.50.

From a longer-term perspective, El Paso is particularly attractive relative to exploration stocks because it has lucrative prospects, coupled with stable transportation cash flow. Also, it remains undervalued relative to peer investments, selling for a trailing earnings multiple of 11, a forward earnings multiple of 13, a book value multiple of 2.2, a sales multiple of 2.1 and a cash flow multiple of 5.4, 43 per cent, 29 per cent, 50 per cent, 32 per cent and 41 per cent industry discounts.

Bullish Scenario: BMO Capital Markets forecasts an advance of 31 per cent to $19.

Bearish Scenario: Goldman Sachs ranks the stock "neutral", with a $14 target.

3. Occidental Petroleum is an integrated oil-and-gas company, with operations in the U.S.

The Los Angeles-based company has strong operating momentum, having grown 12-month sales 27 per cent and net income 76 per cent. Its stock has been a top performer over a three-year span, having gained 12 per cent a year, on average. Occidental has a market capitalization of $78-billion. It receives positive rankings from 84 per cent of researchers. It is scheduled to report fourth-quarter results on Jan. 26. Analysts forecast a 17 per cent year-over-year rise in adjusted earnings and a 7.6 per cent gain in sales. Occidental has an average earnings surprise rate of 6.6 per cent. It beat the consensus expectation by 8.2 per cent last quarter.

Like Chevron and El Paso, what is most attractive about Occidental is its relative value amid strong secular growth. Its stock sells for a forward earnings multiple of 13 and a book value multiple of 2.5, 28 per cent and 43 per cent peer discounts. Its PEG ratio, the stock's P/E divided by researcher's long-term growth forecast, of 0.3 represents a 70 per cent discount to estimated fair value, a compelling bargain. Occidental pays a quarterly dividend of 38 cents, converting to an annual yield of 1.6 per cent. It has grown the payout 16 per cent and 18 per cent annually, on average, respectively, over three- and five-year spans. JPMorgan, optimistic about Occidental's long-term trajectory, is skeptical of the recent rally.

Bullish Scenario: Goldman Sachs has a target of $111, suggesting a 13 per cent advance.

Bearish Scenario: JPMorgan has a target of $90, implying that the stock will drop 8 per cent.

2. Schlumberger is an oilfield-services company, selling project management, technology and information services to oil and gas companies.

Its business is gaining momentum. Schlumberger released fourth-quarter numbers Friday. Its adjusted earnings tally of 85 cents, representing 25 per cent year-over-year growth, beat analysts' consensus expectation by 9.5 per cent. By comparison, Schlumberger has an average historical earnings beat of 3.8 per cent. Its fourth-quarter sales, up an impressive 58 per cent year-over-year, beat the consensus by 3.9 per cent. In classic sell-the-news fashion, Schlumberger dropped 2.1 per cent on the earnings report. It is up 31 per cent over three months.

Schlumberger receives "buy" recommendations from 86 per cent of researchers, who all see major upside in the stock. A median price target of $97.71 suggests an impending one-year gain of 17 per cent. Schlumberger purchased Smith, another energy services company, in an $11-billion all-stock deal last February. Smith contributed $275-million of quarterly operating income. Revenue synergies are "increasing in each successive quarter", according to management. Schlumberger's net profit margin dropped from 14 per cent to 11 per cent during the quarter due to higher costs across the board. Still, that net spread compares favorably to both peers' and other industries' net margins.

Schlumberger is costly. It commands a forward earnings multiple of 23, a book value multiple of 3.8, a sales multiple of 4.8 and a cash flow multiple of 22, all industry premiums.

Bullish Scenario: UBS expects Schlumberger's stock to advance 24 per cent to $103.

Bearish Scenario: HSBC has a 12-month target of $80, consistent with a 4 per cent decline.

1. Halliburton , like Schlumberger, is an oilfield-services company, with completion and production as well as drilling and evaluation segments. Halliburton is scheduled to release fourth-quarter results this morning. Analysts forecast an adjusted profit of 63 cents, equivalent to 126 per cent year-over-year growth, and $4.9-billion of sales, equivalent to 32 per cent year-over-year growth. In the third quarter, Halliburton posted 87 per cent profit growth, beating the consensus expectation by 3.4 per cent, but its stock still fell 4.8 per cent on the announcement. Analysts are bullish on Halliburton, with 89 per cent advising clients to purchase shares. A $53.21 median target implies 37 per cent upside.

Bullish Scenario: Deutsche Bank predicts that the stock will soar 61 per cent to $63 in 2011.

Bearish Scenario: Sanford Bernstein rates the stock "market perform" with a $46 target.

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