BY LAURIE WINSLOW World Staff Writer
Sunday, September 16, 2012
9/16/12 at 3:16 AM
Energy stocks have taken a beating in the past year or so, but could that be changing?
Some area investment professionals seem to think so, especially if the economy continues to rebound. But they also like the fact that many area energy companies are big and stable and pay attractive dividends.
Readers who pick up this year's Tulsa World Investment Guide, which appears as an insert in this Sunday's paper, will find that energy companies dominate the pages.
Perennial favorite Wal-Mart Stores Inc., still appears, but even it has steadily fallen from its lofty perch and this year ranked No. 5 overall.
Annually, we compile this guide and its top 20 area stocks based on picks from Tulsa-area investment professionals who select 10 stocks out of nearly 70 from the Tulsa Index, which they think will perform best over the next year.
Granted, the Tulsa Index is heavily weighted with energy stocks to begin with, which automatically may lead to more energy companies than nonenergy firms being selected for the guide.
But this year seems even more densely packed with energy. So we decided to ask some investment professionals to talk about their outlook for energy stocks and what potentially makes them an attractive investment buy.
"I think they are undervalued," said Jake Dollarhide, CEO of Longbow Asset management Co. "Energy stocks, in many cases, are being ignored, and I think it will be the next group to take off. I think, in turn, that's why you see so many of the local analysts putting it in their top 10 list for the next year."
The last year and a half has been a difficult time to invest in energy stocks, said Dollarhide, pointing to previously low oil prices and natural gas prices being in an unprecedented bear market, falling below $2 per 1,000 cubic feet.
Oil and gas stocks have underperformed the overall market, but now there is pent-up demand in the energy markets, and Dollarhide expects more people will look for opportunities to jump back into energy stocks.
"Many offer dividends on top of potential growth or stock-price appreciation," he said. "But many, frankly, are poised because of their strong footprint in the overall U.S. energy map and because of their attractive assets. I would say that most all of the energy stocks represented in this year's top 20 list have the potential to experience impressive growth over the next one to five years."
The arrival of autumn, along with the critical heating season on the East Coast and northern parts of the country, also could help some energy companies, said Dollarhide. He noted that many of the companies that appear in the Tulsa Index are heavily concentrated in natural gas such as Devon Energy Corp, ONEOK Inc. and Unit Corp.
John Olson, a fund manager with Houston Energy Partners, notes that the outlook for many energy stocks in the coming year are heavily tied to the price of crude oil.
If crude oil goes from $95 a barrel to $150, it will be a great year. If it goes from $95 to $50, it won't be a good year, he said.
"The correlations are so strong," Olson said. "That takes a lot of the air out of these companies because the stock prices are so tied to crude oil prices."
All of Dan Safranek's top 10 picks for this year's guide were energy related, including Chesapeake Energy Corp., ConocoPhillips, Williams Partners LP and Williams Cos Inc. and ONEOK Partners, to name a few.
"The outlook for the energy sector as a whole is extremely positive, especially given that the economy is starting to grow and will continue to grow faster," said Safranek, founder of Safranek and Associates LLC, a financial services firm in Tulsa.
"The consumption of energy is a fundamental component of economic growth, and as the economy is rebounding - and it's going to pick up steam as we go forward - the consumption of energy will increase. And that bodes very well for our energy companies."
Energy companies also tend to be larger and more stable and predictable than a lot of companies. Investors can more easily understand what energy companies do and how they make money as opposed to many technology companies, which produce a gadget or concept, Safranek said.
"It's harder to get your head around those type of companies.... With energy companies, it's real straight forward," Safranek added.
Moreover, some energy companies pay a "very nice" dividend and generate income. Nowadays, that is something investors are looking for, especially when faced with such low interest rates with Treasury Bills and government bonds.
Dividends are definitely something that Brian Smith, a founding partner of CastleRock Financial Advisors in Collinsville, focuses on when evaluating stocks. In a sideways stock market like experts are seeing now, the dividend provides a major portion of an investor's total return, he said.
The dividend yield is calculated by dividing the annual dividend per share by the stocks' price per share. If a company's annual dividend is $1.50 and the stock trades at $25, the dividend yield is 6 percent.
If the stock price rises by 5 percent and also carries a 4 percent dividend yield, than an investor now has a 9 percent total return, Smith said.
To novice investors interested in owning energy stocks, investment professionals suggest looking at diversified energy mutual funds or exchange-traded funds that invest in different facets of the energy sector rather than trying to select a few stocks on their own.
There are ways to buy into the energy sector without buying one or two stocks, Dollarhide said, but those who have their own stock portfolio and want to add a couple of energy stocks need to do their homework. Research the company's financials, its price-to-earnings ratio, dividend history and more.
Know what markets the energy companies operate in and what assets they own. Is it a diversified oil company? Does it specialize in certain areas such as exploration and production, transportation of natural gas liquids?
Smith suggests people find a competent financial adviser to help them as opposed to going it alone. But the things investors would look for in an energy company are the same as any company - a strong balance sheet, positive cash flow, its management team, dividend history and debt levels, say investment professionals.
"I'm more of a growth-and-income investor," Smith said. "So I'm looking for rising dividend streams."
The most successful investing strategy in energy in the last several years has been to higher-yielding stocks or master limited partnerships, and collecting the dividend and hoping for the stock prices to go up, Olson said.
He noted that Magellan Midstream Partners LP has done quite well and Williams Partners LP has an attractive yield.
"ONEOK has been a magnificent performer for the past 20 years and ONEOK Partners has been very good," Olson said. "That does not mean they are gong to be good in the future. Generally speaking, the better and safer the yield, the stronger the investment attraction will be almost across the board in any industry."
Laurie Winslow 918-581-8466
Clay Smelley works on a Helmerich & Payne Flex 3 Rig in Medford. MIKE SIMONS / Tulsa World
Kevin Ince works at a Helmerich & Payne Flex 3 Rig in Medford. Investment experts like the fact that many area energy companies are big and stable and pay attractive dividends. MIKE SIMONS / Tulsa World
Carlos Myers works on a Helmerich & Payne Flex 3 Rig in Medford. Oil and gas stocks have underperformed the overall market, but now there is demand in the energy markets. MIKE SIMONS / Tulsa World