Energy Stocks at a Discount

Written By Nick Hodge

Posted October 21, 2011

At first glance, the energy market of late can look like a danger zone.

Both the NYSE Energy Sector Index (^NYE) and the WilderHill New Energy Global Innovation Index (^NEX) have fallen further than the Dow over the last six months.

Energy Index 2011

The Dow has shed about 6% in that time as volatility has reigned.

The Energy Sector Index fell about 15% while the New Energy Index fell more than 35%.

That doesn’t really foster confidence.

But the truth is energy shares — almost across the board — are currently trading at a discount.

And if you’re in the mood for some easy longer-term gains (and even dividends), you’d be well advised to go bargain hunting over the next few weeks.

Good for the Goose

If you’ve seen some of these recent headlines, you know the energy sector hasn’t been all ho-hum:

  • Sinopec (NYSE: SHI) Acquires Daylight (TSE: DAY) for $2.2B in Cash

  • Superior Energy (NYSE: SPN) Merges with Complete (NYSE: CPX) in $6.2B Deal

  • Statoil (NYSE: STO) Pays $4.4B for Brigham Exploration (NASDAQ: BEXP)

  • BHP Billiton (NYSE: BHP) Buys Petrohawk for $12.1B

  • Kinder Morgan (NYSE: KMP) Pays $21.1B for El Paso (NYSE: EP)

That last one is one of the biggest energy deals in history. And it happened this week.

It seems like someone thinks oil companies are on sale at these levels.

If cheap oil companies with access to North America’s fossil fuel rebirth are a good buy for Sinopec and Superior and Statoil and BHP and Kinder Morgan… it stands to reason they’re a good buy for you, too.

We’re all trying to do the same thing here: Buy cheap assets and make money from them.

What’s more, all those acquired companies were bought at premiums to their current share prices.

The logic here couldn’t be any simpler or more straightforward. Many oil stocks are undervalued.


A Contrarian Gander

A similar thing is happening on the cleaner side of the energy space.

Stock performance in the sector, as I told you above, has been abysmal.

But all the other data is pointing in a different direction…

For starters, the third quarter of 2011 (July – September) saw more money invested in utility-scale clean energy projects than any other quarter in history.

Over $41 billion was invested in that time — 9% higher than the previous quarter and 16% higher than the same quarter in 2010.

Another surprise is that the bulk of that money was NOT invested in Europe, which has led for a decade. It wasn’t invested in China either, which has been grabbing most cleantech headlines lately.

Instead, 40% of that $41 billion (or $16.9 billion) was invested in the United States — a 156% increase over the third quarter in 2010…

All while cleantech stocks had one of their worst quarterly performances ever.

The front page story — Solyndra, Evergreen Solar, etc. — is a stark contrast to the bullish data being buried on the back page.

Overall, more money might be invested in cleantech this year than the $243 billion invested globally in 2010. Bloomberg says “Given that the fourth quarter of each year tends to be a strong one, there is a chance that 2011 will run 2010 close, or even beat it.”

Like with oil, companies in this sector are cheap as well.

JA Solar (NASDAQ: JASO), for example, has lost 73% of its share value this year. Yet it’s trading at only 30% of its book value and less than four times forward earnings guidance.

Yingli Green Energy’s (NYSE: YGE) CEO flat out said, “We believe our ADSs (American Depositary Shares) are currently undervalued.” The company is repurchasing up to $100 million worth of those undervalued shares.

I’m bullish on JA Solar and personally own Yingli.

But there are tons of good energy buys out there…

Transocean (NYSE: RIG) is trading at $53.00 with a 6.2% dividend. I’ll probably buy that one, too.

There are plenty of problems out there. But you don’t invest in problems…

You invest in stocks.

Call it like you see it,

Nick Hodge

Nick Hodge
Editor, Energy and Capital

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