3 Energy Producers to Buy on the Next Taper Tantrum

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As the Federal Reserve hints at tapering the bond buying program over the next year, cyclical stocks including energy exploration and production firms should become interesting buys. These stocks have underperformed the market rally over the last year as investors have piled into high yielding stocks as bond yields hit extremely low levels. Now that money should flood out of those stocks and bonds into growth stocks.

The main reason the Fed would stop bond buying would be a generally stronger economy, a situation that should benefit energy stocks that have underperformed. One group that should outperform in this rotation of money into growth stocks includes Halcon Resources (NASDAQ: RAM), SandRidge Energy (NYSE: SD), and WPX Energy (NYSE: WPX). These beaten down stocks not only offer the ability to rebound off weak trading, but the businesses could improve as economies around the world rebound sending oil and natural gas prices higher. Compared to the tech stocks previously covered, these stocks offer a riskier proposition as weak natural gas prices could hold the stocks down even during an economic recovery.

As the chart below shows, these stocks with the exception of WPX have dramatically under performed the market over the last year:

HK Total Return Price data by YCharts

Experienced management

Halcon Resources counts one of the most successful management teams in the energy sector. CEO Floyd Wilson is well known for selling PetroHawk Energy to BHP Billiton near the top in the natural gas market back in 2011. After a few years, he has developed Halcon into a player in the Bakken, Eagle Ford, and Utica shale areas while the market has lost interest in energy producers. With a group of investors he bought RAM Energy in February 2012, but energy exploration and production firms have been out of favor during this period.

Analysts actually expect the company to earn around $0.65 next year making the stock attractive around $5.50. Naturally the level of earnings will ultimately depend on the price of oil and natural gas in 2014, but investors could do worse than bet on a leading CEO in the industry.

The company currently operates 17 rigs across its holdings and is producing 30,000 barrels of oil equivalent per day with 27 wells being completed or waiting on completion. The majority of the rigs are working in the Williston Basin and the El Halcon portion of the Eagle Ford. Due to an aggressive acreage acquisition plan, analysts expect revenue to surge from $247 million in 2012 to an incredible $1.6 billion in 2014. With the stock down 47% in the last year, this aggressive growth plan has not benefited shareholders.

New management

SandRidge has been universally hammered, as investors were frustrated with the constant shifts in strategy by the previous CEO. Tom Ward was forced out a few weeks back yet the stock trades near the all time lows below $5. In addition, the company hired a new CFO less than a week after changing the CEO. The key to the stock will be whether the new executives are able to turn the company around with a consistent plan that the investment community understands.

Analysts expect the company to lose more in 2014 than 2013 as the strategic direction unveiled last month takes effect. At the time, SandRidge announced a 33% reduction in capital expenditures from 2012 levels to only $1.45 billion. The company operated 38 rigs during Q1 to drill 179 wells, but the new plans call for a reduction to 25 rigs and a total of 425 horizontal wells drilled for all of 2013.

Investors will be interested to see whether the new management team shifts the strategy yet again or if these plans were what forced Tom Ward out. Another shift in strategy would undoubtedly shake off investors yet again.

Ignored spin-off

WPX Energy was spun-off from Williams Companies over a year ago, but the stock has gone absolutely know where during that time period though it has technically gained over 30% in the last 12 months. The previously natural gas focused stock has struggled as an independent while attempting to shift towards oil production. Similar to Halcon Resources, the stock hasn’t had an opportunity to become established due to the weakness in the markets.

The company has hit several successful wells in the Niobrara Shale that could propel it to significant production gains. WPX recently increased the drilling rig count to seven in the Piceance Basin where it is surprisingly pushing to increase natural gas production. The stock trades at roughly 1 times sales and could see significant gains if the economy was to improve and send natural gas prices higher.

Though the stock has gained 30% in the last year, it has done relatively little since the spin-off while investors expect higher returns from energy firms than matching the gains of the S&P 500.

Bottom line

As the market over reacts to the signals by the Fed that it will eventually need to reduce the aggressive bond buying program, investors should look to shift into these energy stocks. Investors need to remember that even with reduced bond buying, the Fed is far from increasing the Fed funds rate from historical lows. The stocks of Halcon Resources, SandRidge Energy, and WPX Energy all have new corporate structures that have occurred in the recent downturn for E&P firms. WPX offers the best valuation while Halcon has the potential to be a big winner if Floyd Wilson can create another star stock. SandRidge provides possibly the biggest risk and return as a completely new management team can be very unpredictable, yet the company has a set of attractive assets. Either way, investors should look to scooping up one of these energy stocks on the next taper tantrum.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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