Energy Stocks Too Cheap or Safe to Ignore

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

In light of the market turbulence, investors have been on the fence about equities. Some still claim that the market is overvalued, but it trades at lower PE multiple than the historical average. And, in particular, energy stocks are cheaper on a PE basis relative to the market than they have been in years. Below, I review several stocks that I find attractive.

Why You Should Buy Suncor (NYSE: SU)

At a respective 11.1x and 10.2x past and forward earnings, Suncor is at a compelling valuation. It is rated a 1.7 out of 5 on the Street where "1" is a "buy." Barclays has a $48 price target on the stock versus $42 for Stifel Nicolaus; it currently trades around $34. Fortunately, the company has $5.6 billion in cash to invest in high-growth projects. The financial position has only gotten better since 2012 CapEx was guided for $850 million lower than expected as a result of low expenditures on the Firebag Stage 4 oilseeds project--a facility that is now at full design capacity of around 120,000 bbl/d. Because of this position, management is now considering parlaying its extra cash into three multi-billion dollar projects in Alberta.

There are several other reasons why you should be bullish on Suncor. Management expects to exit 2012 with cash costs below $35 per barrel in oil sands--particularly strong in light of substantial maintenance. Oil sands drove record cash flow of $2.74 billion in the third quarter alone, as the company is taking advantage of strong crude prices and refining cracks. Refineries have operated at a solid 96% capacity, and the Firebag in-situ project continues to best internal and external predictions. Refineries generated a record $1 billion in cash flow for the quarter.

Analysts forecast Suncor growing EPS by 5.5% over the next five years. This should be more than enough to generate solid returns when complemented by low multiples and a 1.5% dividend yield. Free cash flow generation has also improved substantially--breaking even around the dawn of 2011 on a TTM-basis and then hitting $4 billion today. This is a strong 7.7% yield for an oil & gas producer.

Differing Risk/Reward Exxon Mobil (NYSE: XOM) & BP (NYSE: BP)

If you are looking for more stability, I encourage buying Exxon. If you desire upside, I encourage buying BP. First, let's look at Exxon. The world's largest oil & gas producer trades at 9.4x forward earnings and is forecasted for 6.3% annual EPS growth over the next five years. While the company generated $20.9 billion in the TTM ending 3Q12, this is a disappointing dip from $27.6 billion a year ago. During the same time (one year), Exxon appreciated by 9.5%. In addition, I believe the fears over the small oil spill in the Gulf of Mexico in the Niger Delta are overblown. Meanwhile, the planned sale of an oilfield in Iraq will mitigate the company's exposure to politically risky regions. The company is reportedly in talks with Lukoil, CNPC, Eni, and Shell over the sale, which is expected to be completed by the end of this year. Diversification away from Iraq will also enable the company to better focus on exploration of Kurdistan.

Now that BP has settled its Macondo incident by agreeing to pay $4 billion--less than 20% of last year's net income--shareholders can now begin focusing on the upside. At a respective 7.6x and 8.1x past and forward earnings, I expect BP to see significant value creation in the next few years. The addition of a 5.1% dividend yield only further secures strong returns.  Benchmark Capital has called it a $55 stock, the same price that Oppenheimer pegs its value at. This is at more than a 30% premium to the prevailing price. With a return on invested capital of 11.3%, BP is already creating value and doesn't have to rely on just multiple appreciation, which is likely as the economy recovers. The company's sale of TNK-BP to Roneft for $12.3 billion and 20% of OAO Rosneft has also driven up speculation about aggressive share repurchases to the tune of ~$5.9 billion.

BP is restarting production in Ula after a two month shutdown from a leak. This field has been forecasted to generate around 11,000 bbl/d in 2012. In addition, the company has won four Nova Scotia offshore deepwater targets, which rank amongs the most promising areas licensed in recent memory. The portfolio of upstream operations is so promising relative to the market cap that Bloomberg recently reported that they were a takeover target. It is the cheapest of the five largest non-state global oil companies. For this reason, I strongly encourage making an investment.

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