by Aaron Levitt | December 26, 2012 9:58 am
Fresh off its game-changing physical copper fund win, JPMorgan (NYSE:JPM) unveiled its strategy and predictions for the U.S. equity market in 2013. The CliffsNotes version of its outlook is that the new year will see a return to more normal economic conditions across the globe, which will help stock investors. Overall, the bank lifted its year-end target for the S&P’s 500 stock index to 1,440.
The heart of its prediction is that equity investors are “underinvested” by most measures. JPM predicts that many investors — both retail and institutional — have been reducing exposure to beta-rich stocks over the past couple of months as negative headlines about global economic growth and the fiscal cliff continue. However, it anticipates that as the new year progresses, beta-chasing will once again become in vogue.
So where does Morgan predict the best beta opportunities will lie? In energy stocks, of course. Here’s its best of the best list for 2013.
Fresh off its recent Bakken shale deal with Exxon Mobil (NYSE:XOM), Denbury Resources (NYSE:DNR) continues to ride the advances in unconventional oil recovery. The exploration and production (E&P) firm’s approach is straightforward: buy CO2 fields and use that gas to flood existing oil reserves to capture more production. So far, the technique has been working. Since it acquired the Jackson Dome CO2 field back in 2001, its Gulf Coast production has surged, and recent moves — like the Exxon deal — will help it expand production even further.
However, Wall Street hasn’t been too impressed as of late. Many analysts were disappointed in the firm’s Bakken sale — despite being highly beneficial for Denbury’s mission. The transaction gave it access to two new CO2 assets and also opened the door to acquire additional CO2 sources in the near future. That will help with long-term production.
Denbury is now dirt cheap, at just 13.47 times earnings. Additionally, its $6 billion market cap makes it just the right size to be swallowed up by a hungry bigger fish.
How would you like to earn in excess of $600,000 per day for your services? Well, deepwater driller Noble (NYSE:NE) does, and it will continue to do so for quite some time. As the drilling moratorium in the Gulf of Mexico ends, E&P firms have been chomping to gain access to its ultra-deepwater fields. That demand for state-of-the-art drilling rigs has pushed day rates up past record highs.
With the latest Gulf auction showing that ultra-deepwater drilling is here to stay, Noble will benefit from its commitment to this unconventional resource. The company continues to sell shallow-water jack-up rigs to fund its expansion into the deep.
Like all the stocks on this list, fiscal cliff uncertainty has taken a bite out of NE shares. That gives investors an opportunity to buy the driller at great forward P/E of just 8.
Investors in Occidental Petroleum (NYSE:OXY) have had a rough year to say the least. After reaching a high of around $105, shares of the integrated energy firm have sunk more than 30%. That provides an interesting starting point for new investors, considering the firm’s many positives.
Like Denbury, Oxy is an expert in enhanced oil recovery in properties across the U.S., Middle East, Africa and Latin America. Secondly, the firm owns a host of pipeline, storage and midstream assets that feed its various chemical refiners — exactly the kind of assets that would make a great master limited partnership (MLP) subsidiary.
While it hasn’t officially announced a spin-off, MLPs have been becoming an increasingly attractive option for many energy firms as a way to save taxes and gain hefty distribution payments. Speaking of distributions, investors buying Oxy now gain a juicy 2.8% dividend yield.
Since spinning out its refining operations as Marathon Petroleum (NYSE:MPC) — a success in its own right — Marathon Oil (NYSE:MRO) oil has been on fire. The E&P-focused firm dived head-first into rich oil and liquids shale plays like the Eagle Ford and Bakken, increasing capital spending in these regions.
That spending will bear fruit because Marathon predicts it will more than double its daily production in the Eagle Ford in 2013. That will result in more profit as natural gas liquids pricing is tied to oil, not to historically low natural gas prices.
While Marathon hasn’t been struck down nearly as bad as the other firms on this list, it still offers an interesting buy at current levels. So interesting that Goldman Sachs (NYSE:GS) recently upgraded the firm. MRO can be had for a P/E of 12.69 and a dividend yield of 2.2%.
With a name that means “treasure” in Spanish, refiner Tesoro (NYSE:TSO) was certainly a treasure to investors in 2012. Earlier in the year, the curse of higher crude oil prices and dwindling refining spreads made the downstream sector one of the worst places to operate. However, as crude prices have drifted lower, and feedstock prices have come down, the refiners have been sitting pretty.
While its share price has almost doubled in the last 52 weeks, Tesoro still represents one of the sector’s better choices. It continues to benefit from the relationship with its MLP midstream subsidiary Tesoro Logistics (NASDAQ:TLLP) as well as its access to cheap West Texas Intermediate crude.
For investors, Tesoro could be one of the better choices to gain some beta in 2013.
As of this writing, Aaron Levitt didn’t own any securities mentioned here.
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