An Energy Bull's Presentation On Why You Should NOT Buy These 2 Companies

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

While I find that energy stocks are undervalued in general against historical levels, one should always try to see the other side. Falling victim to confirmation bias can lead value investors to becoming their own worst enemy, so, in this article; I look at two well-known energy stocks and focus on some of the bearish points. In particular, I attempt to see why Exxon's safety and Suncor's oil sands projects--commonly viewed as tailwinds--could end up being negative catalysts...

Low Beta As a "Negative Catalyst" For ExxonMobil (NYSE: XOM)

While Exxon has been long viewed as the safest producer, its safety, ironically, may prove to be a negative short-term catalyst. A Goldman Sachs analyst has argued that investors will move towards higher beta, or risker, energy stocks. I believe this will be the case only if the company's growth curve shows signs of dying down, so let's review:

On the exploration side, the company's partnership with Statoil successfully found its third discovery of offshore gas near Tanzania. New figures won't come out to around 2013, but the partnership has found 9 Tcf so far and need 3 Tcf more to be commercially viable. The company is also exploring offshore resources near South Africa from a 75% interest in a JV with Impact Oil & Gas. Following, the UK's removal of a more than year-long ban against fracking, management has also expressed interest in exploring the country's quiet shale gas industry. Reports, such as (1) the addition of $1 billion natural gas processing facility in Southeast Australia to meet rising Asian demand, (2) a LNG export business on western Canada, and (3) a restart of exploration in Canadian Arctic add to the upside story. The latter area of reserves is believed to contain 90 billion barrels worth of recoverable oil.

The company is also doing plenty of selling. It is reportedly in negotiations with several large oil & gas companies to sell its West Qurna-1 oilfield stake, a $50 billion project, in Iraq. This will help the company better focus on E&P in Kurdistan, which is in a dispute with Baghdad. Exxon is further reportedly in negotiation with Poland's largest oil producer, PKN Orlen, to sell its shale gas permits after two wells were deemed not profitable for investment.

Exxon is trying a strategy of de-risking its operations. It has moved away from the politically uncertain regions and instead focused more on reliable streams of income. While the earnings trajectory has still been better-than-expected in recent quarters, this strategy still comes with little upside--a point energy investors may take more to heart when the economy is in a full recovery.

Oil Sands As A "Negative Catalyst" For Suncor Energy (NYSE: SU)

This Canadian oil producer faces one major issue: a lot of Canada's oil pipelines are full, and there could be production delays. The oil sands producers will have to compete for pipelines at least until 2014.

According to CIBC's Andrew Potter, “When plotted against planned pipeline capacity, it becomes abundantly clear that not all company planned oil sands projects can proceed... No company voluntarily gives up the quest for growth [but] some will have to."

At the same time of output constraints in the lucrative oil sands, domestic oil production is cutting into Canadian crude prices. Suncor is less vulnerable to margin pressure, however, because of its decisions to reduce costs, boost rail shipments, and increase refinery output. However, this hasn't stopped the company from rethinking some of its oil sands investment.

Management is guiding for 570,000 - 620,000 boe/d, which represents an 8% growth in production. However, November production of 312,000 boe/d came out lower than expected as a result of unplanned maintenance. Full-year oil sands production was also at the lower-end of its 325,000 - 340,000 boe/d guidance range.

Even still, the Street is optimistic that Suncor will deliver. It is rated a 1.8 out of 5 where "1" is a "buy" and has a consensus price target of $42.50, which is a ~30% premium to the prevailing price. Analysts forecast just 5.5% annual EPS growth over the next 5 years, which comes on top of a 1.6% dividend yield. Shares have risen 27.8% from the 52-week low. I find that these growth rates amidst the headwinds mentioned above makes Suncor a stock to avoid for now.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. 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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