While most of the energy sector is dominated by large-cap oil stocks like behemoth Exxon Mobil (XOM) or small-fry wildcatters just getting started, the truth is that firms in the middle could be some of the sectors best bets.
Midcaps — or firms with market caps between $2 billion and $10 billion — could be the sweet spot for energy investors. That’s because midcaps provide the right mixture of attributes for almost all market situations. These stocks typically enjoy strong cash flows, stable business models and less volatility than smaller equities. Plus, midcaps are just small enough to grow faster than their larger counterparts, yet offer equally strong dividend potential.
Those facts have actually helped midcap stocks outperform both large and small-caps over the longer term — by almost 7 percentage points when it comes to mid- vs. small-caps over the last ten years. For energy investors, that trend has held true as well.
So 2014, the choice is clear — owning midcaps could provide the necessary boost that a portfolio needs. Here are five of the best energy midcap stocks to buy now.
As we’ve seen before, shareholder activism can lead to big wins in the oil sector. Midcap E&P firm WPX Energy (WPX) is a prime example. The oil stock was spun off from pipeline giant Williams (WMB) back in 2011 and has since focused on producing natural gas and natural gas liquids in Colorado, New Mexico, North Dakota, Pennsylvania and Wyoming. This includes new acreage in the prolific Bakken shale.
However, after being spun off, WPX hasn’t exactly lived up to its potential on the profit front. And after numerous quarterly losses, activist hedge fund Taconic Capital Advisors LP — WPX’s largest hedge fund — got mean and initiated a series of proposals.
These include replacing the current CEO with one more focused on cost controls, spinning off the firm’s pipeline and gathering asset into a master limited partnership (MLP) as well as shrinking the size of the company’s board.
All of which, should help make WPX realize profits in 2014. And given the fact the WPX stock is up about 35% in 2014 — without any actual earnings — more good times could be ahead for WPX stock investors once it starts actually making money.
While Continental Resources (CLR) continues to be the big boy on the Bakken block, midcap Oasis Petroleum (OAS) is quietly making a name for itself in the region.
Over the last two years, OAS has managed to increase its reserves in the Bakken by more than 80% via drilling and strategic acquisitions of smaller wildcatters. More importantly, those reserves are predominately oil-rich — with about 90% of them being high valued crude oil. This fact, plus higher actual production, has allowed OAS to produce some mammoth profit gains relative to its midcap size. OAS profit estimates are nearly 16% higher in 2014 vs. this year’s number.
Those profits and its oily reserves have made OAS stock one of the best-performing oil stocks in the sector. And 2014 could be similar.
OAS’s midcap size makes it perfect for a larger energy stock to swallow up. As these larger energy firms grapple with falling production, midcaps like OAS are perfect and relatively easy ways to gain instant oil reserves.
Even if the buyout doesn’t happen, OAS shareholders should be pleased in the New Year as the firm racks ups production gains.
One of the most important ingredients in fracking a well is one of the simplest — sand. And frac-sand demand continues to skyrocket as North America adopts the advanced drilling technique at rapid pace.
However, as simple as it is, sand can also be pretty complex.
At its core, CARBO Ceramics (CRR) manufactures synthetic proppants used in oil and gas drilling. The takeaway for E&P firms willing to cough up the extra bucks for “artificial sand” is that they are able to squeeze out more natural gas and shale oil from wells using CRR’s products — about 20% more. That extra production, especially given the high price for oil, can mean the difference between whether a project is profitable or not.
For CRR stock, it means some hefty profits as well.
On its latest earnings release, CRR managed to produce a profit of $1.31 per share, trouncing analyst expectations by a whopping 48 cents per share — all driven by increased demand for its products. More importantly, CARBO predicts that it will sell about 40 billion more pounds of its ceramic proppant in the new few years.
All in all, that mean more big gains for CRR stock.
The natural gas glut that took place a few years ago hurt many producers, including Ultra Petroleum (UPL). However, with natural gas prices beginning to rise after a series of extra cold and snowy weather conditions in the Northeast, UPL stock is on the move.
And those gains could continue into 2014.
That’s because UPL is a focused natural gas driller. As of the end of 2012, UPL’s mix of production included about 96% dry natural gas. The key for Ultra is also that most of that production doesn’t come from hard-to-crack shale rock. The majority of its assets lie within Wyoming’s Pinedale gas fields. These more “traditional” vertical wells feature longer producing lives and much cheaper drilling costs to complete.
As more of a traditional natural gas play, UPL has managed to have some of the cheapest drilling costs out there and should benefit the most from rising natural gas prices.
While UPL has recently made moves to diversify its product mix to include more oil, the truth is it will still be a prime natural gas play. For investors, UPL stock is one of the best “pure-plays” for the next rise in natural gas.
SM Energy Company
Two of the hottest shale plays in the nation are the previously mentioned Bakken and Texas’s Eagle Ford. Both have the right mixture of shale oil and NGLs that make them hugely profitable for E&P firms.
Covering production in both is midcap energy stock SM Energy (SM).
That acreage in the prime plays continue to pay big benefits for the firm. Profits at SM surged in the last quarter as higher oil and NGL prices padded the firm’s already hefty bottom-line. And SM predicts more will be in store throughout the year as its production will increase 16% in 2014.
While the growth in its Bakken and Eagle ford assets are enough to be excited about SM stock, the firm does have another ace up its sleeve — namely the Permian Basin and Wolfcamp shales. SM has recent amassed drilling rights on 53,500 acres in the Permian, while its first series of two test wells in the Wolfcamp have been absolute gushers.
Those two new catalysts could be exactly what SM needs to be a great energy stock midcap pick in 2014.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.