Bears Wrong on These Energy Stocks, Buy Them

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

Halliburton and Suncor are two companies that I have been generally bullish about for some time now. While the former has been irrationally beaten down by uncertainty in North American margins, the latter has been irrationally beaten down by supply pressures in Canada's oil sands. While they operate in two very different slices of the energy sector, their similarity lies in how they have both been subject to larger headwinds that their competitors have not been exposed to. Below, I provide my take on the two producers.

Halliburton (NYSE: HAL)

Halliburton is one of the largest oilfield service companies in the world. It has a huge global presence and more than 72,000 employees. Halliburton recently announced the results of fourth quarter earning from continuing operations of $589 million, which is equivalent to $0.63 per share. In the third quarter, however, earnings from continuing operations amounted to $608 million, or $0.65 per share--so there was a slight decline. But results were still above expectations and resulted in a positive market response. Total revenue for the 2012 fiscal year amounted to $28.5 billion, which was a 15%--or $3.7 billion--increase compared with 2011’s earnings. Record revenue in the fourth quarter amounted to $7.3 billion, which was a 3% increase. 

The company owes its momentum to product diversification, which enabled business to navigate volatility in any one segment. As I have long predicted, the company was also big gainer from developing unconventional wells in China and Australia. This international diversification is also seen as a strong hedge against domestic pressure pumping uncertainty. At the same time, Halliburton is also reaping gains from deep water technology, which is seen to be important for the company’s growth in the years ahead. In this quarter, there was news that the company entered into a contract to provide service to TNK-BP oil fields in Russia. This is an important opportunity for the company to demonstrate its capabilities and increase its chances of winning future contracts in this country.

Suncor (NYSE: SU)

Suncor is also a leading oil & gas company. The Canadian company mainly concentrates on oil sands. By 2011, the company had 13,026 employees and revenue worth $39.3 billion. In the same year, net income was $4.3 billion while total assets amounted to $74.8 billion. The most significant acquisition that Suncor has ever undertaken is that of Petro-Canada, which involved $21 billion.

Suncor is well positioned to benefit from the expanding Canadian oil sands. There are also plans to extend the pipeline that serves Canada from the current capacity of 150,000 to 400,000. Suncor is currently the one company that has the biggest oil sands reserves in Canada. The company has a robust balance sheet and remains very disciplined on capital allocation. Dividends have increased by 21% each year for the last five years.

And for the "socially responsible" investors, Suncor has put in place technologies that have cut environmental pollution. It has also invested in wind farms that provide clean energy aimed at offsetting the high carbon emission. These investments also may make the company less of a regulatory target, which is important in gaining access to the Canadian oil sands pipeline. Currently, the oil sands have been struggling from excess capacity, so there will have to be a bit of rationing.

Conclusion

Despite their headwinds, Suncor and Halliburton are both leaders in their fields. They are also reasonably priced at 9.6x and 10.8x forward earnigns, respectively. Suncor is forecasted for a growth rate of 6.8% versus 14.5% for Halliburton. To hedge against Suncor's sluggishness, I recommend a high upside company like Chesapeake (NYSE: CHK). This leading natural gas producer just booted their CEO and have been appropriately selling off assets to pay down the debt. At a price-to-book ratio of 0.9x, the stock is incredibly cheap and could unlock value through diversting plays to more capital-rich producers. Together, these three comapnies provide growth, momentum, and value.


TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Halliburton. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. 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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