3 Things to Know About Energy Stocks

Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Do you like playing with fire? Well then, the volatility that energy provides might be just right for you. Let’s take a look at the energy sector to investigate its trials – and the companies who will overcome them. Here are three businesses worth your attention.

Shareholder activists

Sometimes energy companies find themselves in the midst of leadership shake-ups. Either shareholders call for new boards or top managers change course. Or leave altogether.

For example, Chesapeake Energy (NYSE: CHK)(NYSE: CHK)(NYSE: CHK) revamped its strategy to cater to shareholders’ (Carl Icahn’s) desires. Last summer saw Chesapeake roll the dice on new leadership. Shareholders pushed out two members of the eight person board of directors.

Through the shakeup, shareholders communicated a new message: as costs increase for the industry, they would like management to cut back on spending and increase liquidity. The changes didn’t exactly fit the style of long-time CEO Aubrey McClendon. Hence CEO Robert Lawler’s installment.

Discovering and producing fuel

Saddled with the high capital intensive nature of the industry, companies must avoid wasting capital on inefficient and unsuccessful efforts. Otherwise millions (or billions) of dollars could evaporate. But through the right combination of technology, talent, and location, some firms set themselves apart.

Deep sea oil discovery and drilling is no easy task. But Chevron (NYSE: CVX)(NYSE: CVX)(NYSE: CVX) finds a way to make it work. In March, Chevron announced a large discovery of oil in the Gulf of Mexico, it also completed three wells in the Gulf of Mexico this year.

Its success comes from its partnership with Halliburton. Chevron and Halliburton came together to develop a special tool called the Enhanced Single-Trip Multizone FracPac System (ESTMZ). The tool aids in drilling and gives Chevron a leg up. ESTMZ allows drillers to isolate each drilling zone. Then pack and frack these zones efficiently using the best rated proppant, which keeps fractures open, and fracturing fluid in the drilling industry.

Anadarko (NYSE: APC)(NYSE: APC)(NYSE: APC) has a knack for discovering oil in the U.S. and across the globe. Earlier this year Anadarko had an impressive oil discovery of more than 1,000 feet of oil pay zone in the Gulf of Mexico. Anadarko also excels at fracking. With about 400,000 acres in ownership and over 2,500 drill sites, the firm wastes no time increasing production.

Yearly growth of production

Growth of production is often used as a measurement of success for energy companies. Firms measure growth by how many barrels of oil they produce every year. They always look to increase production and expand drilling to stay ahead of the industry. However, as a firm gets larger, this becomes more difficult.

Apache (NYSE: APA)(NYSE: APA)(NYSE: APA) managed to triple its production of oil between 2000 and 2012. Until recently, Apache focused on oil field acquisitions and lofty production goals to grow with the competition. However, after facing some strong challenges, Apache chose to take a new approach.

By selling off assets and buying back shares, Apache hopes to increase liquidity and boost the percent of earnings attributable to each share. In short, Apache hopes to clean up its balance sheet and essentially buy earnings.

BG Group takes a similar approach as Apache. Not only has BG modified production goals, but it’s also discussing selling assets and repurchasing its shares in an attempt to raise cash and reportedly return capital to shareholders.

Apache and BG’s approach may seem counter-intuitive but this is not the case. Both belong to the “million barrel club” (term coined by Robin West) since each firm is expected to reach outputs of one million barrels daily by 2018. Before they can reach this lofty goal, however, these firms realize they must clean up their dirty balance sheets.


To better understand energy firms, we looked into three of the unique trials they face. Within the sector, companies must overcome elbow shoving by shareholders, intense capital requirements for discovering and producing fuel, and growing yearly production while keeping a clean balance sheet. Energy firms who prove they can overcome are those investors will grow to love.

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Marie Palumbo has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool owns shares of Apache and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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