Two Energy Players to Watch: CHK and TSO

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In my investing strategy the goal is to be accumulating stocks when the S&P is underperforming against its long-term trend and taking profits when it outperforms this trend.  Currently, the S&P is outperforming its historic return following its extended rally from November lows.  Taking parital profits never hurts in this situation and doing so helps free up funds for times when the market is offering better value.  

However, that is not to say there is nothing to buy, just one needs to be more choosy in picking stocks; rotating money from extended stocks into fresh opportunities. The Energy sector has suffered a relatively high degree of selling compared to other sectors over the past week or two, driven by a softening in oil prices.  But it’s highly unlikely oil prices will maintain this form heading into the summer driving season.  With the market overlooking the sector, now is a good time to take a look at some Energy stocks.

Two stocks to consider within the sector are: Chesapeake Energy Corporation (NYSE: CHK)  and Tesoro Petroleum (NYSE: TSO)

Chesapeake Energy has been stable trading in a $21-25 range since November. This despite sharp declines in Wall Street estimates and actual earnings for the past three quarters; all fed off falling Natural Gas prices.  Earnings weakness is expected to continue into Q1 of 2012. A consensus EPS estimate of $0.48 is well off last year’s comparable quarter of $0.70 (and actual $0.75).  To add insult to injury, last quarter’s earnings came in a penny below expectations.  Despite the crumbling earnings outlook, stock price has remained remarkably stable.  This stability is the result of buyers setting a floor for the stock, which appears to be $20 based on the recent January low.  It's probably of no surprise when buyers came to the defense of the stock in 2010 they stepped in at $20 too.  This optimism is likely fed by an expectation Natural Gas prices will find a bottom soon, despite the rapid descent in Natural Gas prices. While Chesapeake Energy doesn’t have the leading price behavior of the other two candidates, it does have a strong value component which could reward the patient; a P/E of 9.8 is well below the Industry standard of 19.0. 

Tesoro Petroleum has a been a little more robust in its price action. The stock doubled from the $12s to mid-$25s between mid-2010 and early 2011 as buyers took advantage of rising oil prices to bid up the stock. The stock peaked around $27.50 before a sharp drop in oil prices killed its momentum.  However, the drop in oil prices didn't trigger a rout in the stock price.  When oil prices undercut their 2010 lows, Tesoro Petroleum was trading in the $20s, well above the $12s it was trading when oil prices were higher. The stock had reached a point where buyers were willing to hold it despite weak oil prices.   During this time earnings were a real roller coaster - although reported earnings closely matched estimates.  But even here, when the traditionally soft Q4 earnings came in well below (-$0.29 worse) than the expected -$0.89 earnings loss there was no rush to sell.  Over the course of the year the P/E ratio has steadily declined despite firmness in price action; from high teens in the summer of 2011 to the 7.1 it trades today, well below a competitor average of 11.5.  Expectations for Q1 are for $0.37, which is below the comparable expectation in 2011 of $0.69 (and reported $0.74), but any upside surprise could clear the way for a push above $30.  A break of $30 would send the cat amongst the pigeons and offer Tesoro a key leadership role within an Energy sector recovery. 

Which stock will succeed in a years time? The base builder or the wannabe star. Time will tell. 

The Motley Fool has no positions in the stocks mentioned above. fallond has no positions in the stocks mentioned above. 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.

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