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Catching a Falling Financial Knife

Two Energy Stocks to Buy Now Before Prices Rebound

Companies / Oil Companies Mar 12, 2013 - 03:03 PM GMT

By: Money_Morning

Companies

Tim Melvin writes: If you're looking for energy stocks to buy, now's a good time to snag some deals.

Energy stocks have seriously lagged the overall stock market for some time now as the weak economy has reduced demand.

The Energy Information Agency released a report Feb. 27 stating that oil demand in 2012 was the lowest since 1996, and gasoline demand was the lowest since 2001.


Although it can be difficult to measure accurately, a slower-than-historical growth rate in China seems to have slowed demand from the world's largest importing nation as well.

As a result, the oil services exchange-traded fund (NYSE: OIH) is up just over 0.2% in the past year, compared to the overall market's 15% return. The Vanguard Energy ETF (NYSE: VDE) has a wider scope of energy companies, but also lags the market with a 12-month return of just 4.16%.

In spite of the current weakness in demand, the one thing we know for certain is that the global economy cannot pick up without an increase in demand for oil and gas. Although these stocks are out of favor right now, the odds are high that over the next several years they will become growth darlings once again as energy demand inevitably rises.

Patient contrarian investors can take advantage of this potential profit landfall by buying into these energy stocks now, while they are unloved and very cheap based on historical levels and future prospects.

Two Energy Stocks to Buy Now
Nabors Industries Ltd. (NYSE: NBR) is one example or a world-class company that can be picked up on the cheap right now by astute, patient investors.

The company is the largest land-based drilling contractor and has a dominant position in the United States and Canada. It will be a huge beneficiary of increased shale finds and other unconventional oil and gas activity as it owns most of the rigs.

It also has a presence in Australia and can be expected to expand that over time as new shale discoveries in that region begin to come online in the years ahead.

Although natural gas prices remain weak, the company is taking the long view. Eventually natural gas will become a bigger part of the U.S. energy picture and drilling activity will resume.

With that in mind Nabors has been updating its equipment and modernizing the rig fleet. It also has some smaller divisions for sale as they are now viewed as non-core assets. Nabors will use the proceeds to reduce its overall debt load.

The stock trades for less than the value of the net assets with a price-to-tangible-book-value ratio of just 80%. Nabors' board just announced its first ever dividend - 4 cents per share - and although it is hardly a high-yielding stock it is reasonable to expect that payout to grow as the oil and gas industry improves in the future.

If the shares recover just half of the decline over the past five years of economic weakness, investors at today's price will almost triple their original investment in the shares.

A Reversal for this Brazilian Leader?
In addition to concerns about the oil and gas sector, specific concerns about weakness in Brazilian markets and economy have weighed on the share price of Petroleo Brasileiro Petrobras SA (NYSE ADR: PBR). The company is located in Brazil and has primarily done business in South America, but is turning its attention to its larger northern neighbor.

The company is controlled by the Brazilian government and is one of the largest oil and gas companies in the world. Thanks to the combination of industry and national concerns the stock now trades at less than 25% of the valuation reached back in the middle of 2008.

The company should see strong production increases this year as new fields and projects come online. They also have aggressive expansion plans and have identified $16 billion of non-core assets to sell in order to fund a build out of infrastructure and increased exploration activities.

Much as the combination of sector and national concerns has weighed on the shares, they should combine to give the stock a boost over the next five years. The Brazilian government is working to get the economy back on a growth trajectory and the 2014 World Cup and 2016 Summer Olympics should give the economy an additional boost over the next three years.

With the stock trading at 80% of tangible book value and a single-digit price-to-earnings ratio, the depressed valuation would seem to reflect all the bad news and leave the shares in a position for a sharp rebound.

Petrobras surged more than 15% Wednesday on news it would raise the price of diesel fuel 5%.

The rest of the world's industries cannot continue to get healthier without increasing energy demand. As the global economy shows signs of getting back on track over the next few years, the cheap energy stocks could easily lead the markets higher.

Money Morning Global Energy Strategist Dr. Kent Moors just profiled a new shale oil discovery in Australia. Check out this latest report: The Arckaringa Basin Could Be the Largest Shale Oil Find of All Time.

Source :http://moneymorning.com/2013/03/08/two-energy-stocks-to-buy-now-before-prices-rebound/

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Catching a Falling Financial Knife