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SuperModels Recent articles: • The rebuilding-Louisiana portfolio, 8/30/2005 • Readers pick 7 stocks with double potential, 8/24/2005 • 18 stocks for the bull market's last gasp, 8/18/2005 More... | SuperModels Who's really to blame for $3-a-gallon gas? (Page 2) of 2  PreviousLight, sweet revenge Strangely enough, despite energy companies explosive move in the stock market over the past two years, many of the shares are still very cheap. This has happened because unlike, say, a retailer, a commodity-based business can decide to sell some or all of its product in the futures market at a set price for a certain length of time. A couple of years ago, many oil producers were delighted to be able to sell two full years of production at $30-$35. That looked like a good idea at the time, and allowed them to make a lot of money if their production costs were closer to $10. But those old hedges are expiring, and companies can now turn around and sell their current and future production for $60 to $70 even though their production costs are still a fraction of that.
Analyst earnings estimates for oil and gas exploration companies have not kept pace with the rising cost of the commodity, so a lot of premium companies are selling at forward-looking price-earnings multiples of 15 or less, despite earnings-growth rates that are likely to be north of 25% a year. A good example is Plains Exploration & Production David Anderson, portfolio manager at Palo Alto Investors in California, notes that Plains has told investors that it will produce about 65,000 barrels a day in 2006, and that because of hedging itll probably earn no less than $55 per barrel. Anderson figures that, netting out costs, Plains will actually earn $5 in 2006, so it is trading at a forward P/E of 7 today. If oil stays in the $65-to-$70 range, that P/E is actually more like 5. Yet even if oil falls all the way back to $40 per barrel, Anderson says, the P/E is still at 10, which is cheap. Three other energy exploration companies with valuation and forward prospects profiles similar to Plains, according to Anderson, are ATP Oil & Gas
Fine Print Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Greenbook Investment Management. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Markman did not own or control any securities mentioned in this column.
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