Three US Energy Companies With Upside Potential

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Note: A previous version of this article failed to recognize the Rowan Companies previous sale of its equipment manufacturing business.

According to the IMF, the US is expected to grow 2.2% in 2012 and 2.1% in 2013. Plus, I am sure the estimates for 2013 shall be ameliorated by analysts as data on the labor, consumption and construction markets keep coming in. This timid - although existent - recovery is happening at the same time as the US energy revolution is taking place thanks to the new shale era. To understand the extent of this new age in the US energy sector its important to think about the recent report from the International Energy Agency, which stated that oil production in the US was expected to surpass that of Saudi Arabia and Russia in the next five years.  

Below I chose three undervalued energy companies that are not only being well managed, but they are also set to benefit from this new future scenario.

Apache (NYSE: APA) is in the middle of a significant transition in its reserve portfolio, shifting its Capex towards its US onshore liquids fields. Most analysts have been forecasting reduced 2012 production given some offshore disruptions and this has weighted on the stock, but those disruptions have nothing to do with the strength of APA's core US onshore assets, which is where I think opportunities are located. Actually, as a powerful example of what might be coming for the company, APA has the industry’s second  largest Permian proven reserves, with 751 MM boe.  According to specialists, APA is in a position to grow its Permian production by 15% in 2012, ahead of its 13% yearly growth target which is set to give APA production growth of 7% from its whole asset portfolio from 2013 onwards. The company trades at a 7.8x 2012 P/E multiple and a 4.2x EV/Ebitda multiple, below most competitors. APA is not paying any significant cash dividends, but I would expect this to change in no more than a year when investments start to payback.

Enterprise Products Partners (NYSE: EPD) is a midstream energy company providing a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil and refined products. Above all, the company is the leader in NGL markets across the whole NGL value chain: gathering, transportation, storage and fractionation. EPD just reported 3Q12 results that, as the usual, surpassed street estimates: EPD reported adjusted Ebitda of $1.06 billion USD Vs. consensus of $1.02 billion. But the best is still to come with the expected results from EPD's expansion investments - now running well over $7 billion. For 2013, EPD is expected to generate a $4.5 billion EBITDA. The case here is all about growth and cash flow generation for investors. EPD is positioned to grow its distribution by 5-6% over the next 7/10 years thanks to organic growth opportunities around natural gas shale plays that are booming as we speak, favorable natural gas liquid fundamentals and a super competitive cost of capital that allows the company to win contracts and make the best possible investments. Today EPD pays a 5.2% dividend yield and is ready to grow.

Rowan Companies (NYSE: RDC) is the provider of international and domestic contract drilling services. Given the company's strengths and the exciting scenario in the US drilling business, RDC, today trading at a multiple of 8.9x EV/EBITDA and 15x P/E, will grow and surely become an M&A target (current market capitalization stands at $3.9 billion). Of course, before everything becomes easy, RDC will suffer some growing pains as it's suffering now through their efforts building out their deepwater infrastructure ahead of drillship deliveries in 2014. That said, the company is already growing strong with Q3 revenues at $354 million up 51% yoy and Q3 EBITDA coming at $140 million, on an improved 40% margin.

martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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