Jubak's Journal
Recent articles:
• How to beat the short-term traders, 11/8/2005
• 5 reasons the Fed will fumble in 2006, 11/4/2005
• 5 stocks safe from rising rates, 11/2/2005
More...
| | Jubak's Journal
5 energy stocks for the cold of winter
Sure, computers and caterpillars say it's going to be unusually mild in the coming months. But the first sign of a cold-snap should send these beaten-up stocks soaring.
By Jim Jubak
The Farmer's Almanac predicts a warm winter. Computer models at the National Oceanic and Atmospheric Administration forecast a slightly warmer winter. Woolly bear caterpillars are sporting the wider-than-normal orange bands that, according to folklore, signal a milder winter.
And the commodity and stock markets agree. With unseasonably warm temperatures ruling the Northeast and Midwest -- it was 62 degrees at noon on Sunday as the runners in the New York Marathon made their through Central Park -- the futures market kept the selling pressure on. The December crude-oil futures contract traded on the New York Mercantile Exchange hit a mid-day low of $58.47 a barrel on Monday, Nov. 7. That's the lowest price for a future delivery of crude since July.
All that means, as investors with a contrarian streak know, that it's time to buy the out-of-favor energy stocks that will rally on the first return of seasonably cold weather.
If the woolly bear is wrong
Since lower oil prices mean lower costs to run trucks, trains, and planes, transportation stocks have rallied on the belief in a warmer-than-normal winter. Truckers Old Dominion Freight Line (ODFL, news, msgs) was up 19% in the three weeks that ended Nov. 8 and Arkansas Best (ABFS, news, msgs) climbed 25%. Canadian National Railway (CNI, news, msgs) was up 8% in those three weeks and CSX (CSX, news, msgs) moved up 6%. Continental Airlines (CAL, news, msgs) climbed 10% and (AMR, AMR)), the parent of American Airlines, soared 22%. (Note how the less fuel efficient sectors outperformed the relatively fuel-efficient railroad stocks.)
More from MSN Money
Now I don't know if the almanac, the computer models and the woolly bears are right about the trend for the rest of the winter. Weather prediction isn't much more of a science than, say, stock picking. So without some inside information -- no disrespect meant to the computers or the woolly bears -- on real temperatures this winter, I'm reluctant as an investor to put my money on these predictions and buy transportation stocks. Especially since the transportation stocks have already climbed so far on hopes for a warmer-than-normal winter.
But I do know that investors and commodity traders that at some point this winter we'll have a patch of colder-than-normal weather and suddenly the stock and commodity markets will start to worry about a colder-than-normal winter. The farther the markets swing toward a belief in a warm winter, the harder and farther they'll swing back in the other direction. And with that swing, the sectors that are in favor now will fade and be replaced, at least temporarily with the currently out-of-favor energy sector.
And the place to be when that happens, in order to maximize your gains, will be in the shares of the domestic independent oil and gas companies that have been punished most severely in the move toward cheaper crude. (And to minimize your risk, you should stick to the shares of fundamentally sound oil and gas companies--no speculative stocks trading on potential future big oil strikes, thanks.)
In my regular Wednesday appearance on CNBC's "Morning Call" I picked these three oil and gas stocks for a change in the weather.
Burlington Resources (BR, news, msgs). Shares of Burlington Resources are down about 15% from the beginning of October -- which makes this a classic bounce-back stock since 2006 is shaping up so well. Burlington took a slight hit -- a 1% shortfall in production -- from hurricanes Katrina and Rita in the third quarter and the effects will linger into the fourth quarter with a 2% shortfall in production from earlier estimates likely. But 2006 should see the complete return of production growth in North America and production from fields in the Gulf of Mexico and the Irish Sea, the Barnett Shale deposits in Texas, and in Canada. Production should grow by about 10% in 2006. Investors waiting for the return of cold weather will get price support for their shares from the company's ongoing stock repurchases (about 3% to 4% annually). Longer term, the company acquired 400,000 acres in 2005 with about 1 trillion cubic feet of natural gas equivalent in drillable inventory. That should be enough to keep production growing. Our StockScouter rates these shares a 7 out of a possible 10.
EOG Resources (EOG, news, msgs). Shares of EOG Resources are down about 15% from the beginning of October on the pullback in the price of natural gas to what seems to be solid support at $11 per million British thermal units for December delivery. Looking at third-quarter numbers, the pullback was a result of Wall Street letting its expectations get too far ahead of reality. The company grew production by 14% in the quarter, compared with the third quarter of 2004 -- but that fell short of expectations for 15% production growth. But the company reported three new huge gas wells in the Barnett Shale formation and Wall Street projects that the company will be able to replace 175% of production -- without acquisitions -- in 2005. But for investors looking for a stock that will get the most bounce in any cold-weather rally, EOG Resources' biggest plus may be that as of Nov. 3, all of its production for 2006 was unhedged. Because the company hasn't locked in prices for any of its 2006 oil and gas (81% of production is natural gas), it will get the full up (and downside) from any shift in natural gas prices. Our StockScouter rates these shares a 4 out of a possible 10.
Devon Energy (DVN, news, msgs). Shares of Devon Energy are down 15% from the beginning of October, pretty much tracking the decline in the energy sector. (Devon Energy has a relatively balanced production portfolio of 60% natural gas and 40% oil.) With Devon Energy you get participation in any potential cold-weather bounce but you're also buying a restructuring story that should push the stock higher no matter what the weather is like. In 2005 the company sold assets (such as gas processing plants) acquired in 2002 as part of a divestiture plan that is expected to result in after tax proceeds of more than $2 billion. Part of the cash is going to improve the company's balance sheet -- the company retired $400 million in senior debt in the third quarter -- and to buy back another 50 million shares. The rest will fuel the company's transition from acquisition-driven to exploration-driven growth. The company started drilling on a heavy-oil project in Alberta this year and planned to have 125 wells in operation by the end of the year in its Barnett Shale acreage. A deep-water drilling program in the Gulf of Mexico is in its early stages. Our StockScouter rates these shares a 7 out of a possible 10.
As always, I have two additional "exclusive" picks for readers of CNBC.com on MSN Money.
Chesapeake Energy (CHK, news, msgs). This stock was such a favorite during this year's energy rally that it shouldn't come as any surprise that it sold off so heavily in the October profit-taking in the sector. Shares are down 26% from the beginning of October. But that larger-than-average drop for the shares is also a logical reaction to the company's decision to increase its operational leverage to natural gas prices. Chesapeake is one of the most concentrated natural gas companies in the energy sector with natural gas accounting for about 89% of reserves. The company has built a huge drilling inventory of unconventional gas assets in the last 12 to 18 months, largely using debt, which increases the company's leverage. And unlike many producers Chesapeake owns many of its own drilling rigs -- rather than leasing them from drilling companies -- which again increases the company's leverage. All that leverage increases the upside and downside potential in the stock -- but fortunately this company has one of the best managements in the business. Investors are counting on that to reduce risk. Our StockScouter rates these shares a 10 out of a possible 10.
XTO Energy (XTO, news, msgs). Chesapeake Energy fell more than average during the October sector correction; XTO Energy fell less, about 11%. While Chesapeake has added operational leverage as a strategy, XTO has added leverage by leaving almost all of its 2006 production unhedged. (Chesapeake Energy is about 45% hedged for 2006.) And while Chesapeake has been adding assets wholesale, XTO has been pursuing an acquire-and-exploit strategy built around long-lived assets with an estimated reserve life of 14.5 years on 2004 reserves. For 2006 XTO Energy is projecting 14% organic (before acquisitions) production growth. XTO Energy, despite its unhedged position, is one of the most low-risk stocks in this sector, thanks to low costs and high margins that in 2006 as projected to generate a huge $2.72 a share, or $1 billion in free cash flow. Our StockScouter rates these shares a 10 out of a possible 10.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Chesapeake Energy. He doesn't own short positions in any stock mentioned in this column.
|
