2011 was a tough year for many of the energy stocks, especially the smaller explorers.
They were beaten down in the summer selloff, with some declining 50% as investors feared that a global recession was soon to start. Any global slowdown would clearly mean lower energy prices.
But when that didn't happen, the exploration companies were suddenly super cheap. They have since rallied off the summer lows but haven't yet regained the old highs. They are still out of favor with investors.
Will Iranian Tensions Be a Catalyst?
At the end of 2011, crude surged to close at just under $100/barrel (bbl). In 2012, the upward momentum has continued as the price has risen nine of the last 12 sessions and is still holding over $100/bbl.
Traders are blaming the saber-rattling out of Iran. Iran is threatening to shut down the Strait of Hormuz, a major shipping lane for crude, if the European Union (EU) follows through with a proposed oil embargo. Twenty-eight EU foreign ministers are meeting on Jan. 30 to debate an embargo, but many believe it is probably a done deal.
The EU uses about 600,000 barrels (Mbbl) of Iranian oil a day, which could be replaced by the Saudis if they raise production (which they have already offered to do.) But the embargo would still make tight supplies even tighter.
Analysts are already guessing we'd have $125/bbl oil if the oil embargo actually happens. It could go higher still if the Strait of Hormuz was shut and/or an actual military conflict occurs in the Persian Gulf.
The Magic Combination
What if you could buy a stock with a cheap valuation, but that was also growing its earnings by the double or triple digits? Too good to be true? Not with some of the exploration companies.
Because the stocks are out of favor, valuations are very attractive. That means their price-to-earnings ratios (P/Es) are below 15, which is what I usually deem a "value" stock.
Earnings growth was explosive in 2011 and Zacks Consensus Estimates are also flashing bullish signals about 2012 as another year of double-digit earnings growth appears to be on tap.
With the stocks so out of favor but the market now preparing for the possible perfect storm of growing demand but tight supply due to a Middle East oil shock, now may be a perfect time to add energy positions to your portfolio.
Three Energy Companies with Explosive Earnings Growth
Forget the small caps. The mid-cap explorers have great valuations and amazing growth projections.
1. Plains Exploration & Production Company (PXP)
Headquartered in Houston, Plains explores for oil and gas in California, the Gulf Coast region, including the Haynesville and Eagle Ford Shale, the Gulf of Mexico and the Rocky Mountains.
This Zacks #2 Rank (buy) has a $5.5 billion (B) market cap.
2010 Earnings: $1.06; 2011 Expected Earnings: $1.79 (growth of 69%); 2012 Expected Earnings: $3.30 (growth of 84%)
Forward P/E: 11.8
2. Rosetta Resources Inc. (ROSE)
You might not have heard of Rosetta, but it isn't a small company, as it has a market cap of $2.4B. Like Plains, it is also based in Houston, but has exploration operations mainly in South Texas, including the Eagle Ford shale and the Southern Alberta Basin in northwest Montana.
It is also a Zacks #2 Rank (buy).
2010 Earnings: $0.61; 2011 Expected Earnings: $1.97 (growth of 223%); 2012 Expected Earnings: $3.54 (growth of 81%)
Forward P/E: 12.7
3. Berry Petroleum Company (BRY)
Based out of Denver, this exploration company operates in California, the Uinta basin in Utah, East Texas and the Permian Basin, and in Colorado.
This Zacks #2 Rank (buy) has a market cap of $2.4B.
2010 Earnings: $1.53; 2011 Expected Earnings: $2.65 (growth of 73%); 2012 Expected Earnings: $3.92 (growth of 48%)
Forward P/E: 11.2