2 Energy Stocks to Buy Despite Headwinds

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Halliburton and Suncor both face a similar problem: While they are leaders in their field, they face unique headwinds that their competitors do not. However, recent momentum and decisions made by both position the two for incredible upside. Below, I review why I am optimistic on their stocks.

Halliburton (NYSE: HAL)

Halliburton is a market leader in the energy industry and ranks just behind Schlumberger (NYSE: SLB) in the oilfied service category. Looking at Halliburton’s revenue, one can tell that the company has been doing well for the last three years. In 2010, the company had revenue amounting to $18 billion, while, in 2011 it was $24.8 billion. In 2012, it was $28.5 billion. The results indicate a continuous and steady path of growth--a Warren Buffett kind of investment, if you will.

Taking a look at profitability, one notices that the company's 14.6% operating margin, which is healthy considering that the leader in the industry, Schlumberger has operating margins only 240 bps higher despite being 2.7x bigger. The working capital ratio of 2.8x is quite high compared to Schlumberger, which has an operating capital ratio of 1.95. A working capital of more than 1 indicates that the company is able to clear all their debts if such a move was mandatory. Halliburton has also been reducing its debt, as evidenced by the ever-falling debt to equity ratio. The ratio has reduced from 26.9% to 26.7% and finally 23.4% in 2010, 2011 and 2012, respectively.

At around 15.4x past earnings, Halliburton may be at a 52-week high, but I don't think its momentum will slow down any time soon. Nor, for that matter, does the Street. Analysts rate the stock a 1.9 out of 5 where "1" is a "buy." They are forecasting a terrific 14.5% annual EPS growth rate over the next five years.   

Suncor (NYSE: SU)

Suncor recently announced their “2013 capital spending plan” and their production outlook. The company set aside $7.3 billion for capital spending. The money is to be used in the growth and sustainability of projects. Daily oil production is expected to increase by 8% to the range of between 570,000 and 620,000 barrels a day. This increased production will also mean that oil sands production will increase by about 12% compared to the previous year.

Out of the $7.3 billion, $3.3 billion is expected to be used for growth projects. This is particularly important, because the company is suffering from investors who are afraid of the company's flat growth curve--analysts only forecast 3.6% annual EPS growth per year over the next five years. Fortunately, more than half of the project development fund is aimed at advancing high-growth exploration as well as production in Hebron and other areas. With Eastern Canada suffering from low prices, this is just the kind of exploration that Suncor needs to widen margins and keep investors glued on the upside.

The company also expects to spend more than $1.2 billion in expanding oil sands activities in Base and Situ for long-term growth. And due to the company’s cost efficiency as well as the reduced spending in 2012, it has opened 2013 with a robust balance sheet. This will enable the company to take this aggressive growth spending path without much fear of a credit rating downgrade. Just in case, the CEO also mentioned that are looking to scale back on the Voyageur project.

Conclusion

Halliburton and Suncor are two well-run companies despite the headwinds. The former trades at a respective 15.4x and 10.8x past and forward earnings versus corresponding figures of 17.8x and 9.5x for the latter. While I recommend buying both, I also recommend hedging with a stabler producer, like ConocoPhillips (NYSE: COP). This mammoth of an oil & gas company trades even cheaper than both at 9.7x past earnings while paying out a terrific dividend yield of 4.6%. The beta also isn't too bad at 1.1. Thus, while Halliburton and Suncor could provide some growth momentum, Conoco will pass on a consistent stream of income and stability.


TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Halliburton. 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

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