While most of the energy sector is dominated by large-cap oil stocks like behemoth Chevron (CVX) or small-fry wildcatters just getting started, the truth is that firms in the middle could be some of the sector’s best bets.
Midcaps — firms with market caps between $2 billion and $10 billion — could be the sweet spot for energy investors. That’s because midcaps offer the best attributes of large- and small-cap stocks. Typically, midcaps benefit from strong cash flows, stable business models and less volatility than smaller equities. There’s plenty of strong dividend potential as well. On the other hand, midcaps are just small enough to grow faster than their larger counterparts.
This combination of factors has helped midcap stocks beat both large and small-caps in the returns category over the longer term. And in the energy sector, that outperformance has held true as well.
For investors, focusing on the stocks right in the middle could be the key to long-term outperformance and portfolio gains. Here are five midcap energy stocks to buy now:
Midcap Energy Stocks To Buy #1: Atwood Oceanics (ATW)
The offshore contract drilling sector is dominated by larger firms like Transocean (RIG) and Noble (NE). However, with a market cap of just $3 billion, Atwood Oceanics (ATW) could be in the sweet spot for investors looking at midcap energy stocks.
ATW is a much smaller offshore driller than its rivals — owning a fleet of just 14 rigs and drillships. However, Atwood’s small fleet is actually pretty modern and features four ultra-deepwater drillships and two ultra-deepwater semisubmersibles.
While day rates for ultra-deepwater rigs have taken a breather as of late, these ships still command a hefty price tag. ATW’s most advanced and newest rig — the Atwood Hunter — is under contract with a cost to rent of $515,500 per day. That rate is 75% higher than the average day rate of similar rigs ($294,000).
An added benefit is that the bulk of ATW’s rigs are actually working rather being cold-stacked. Its rigs have been booked for 92% of all the days remaining in 2014, while 2015 is currently booked at 80%. Those high rates should help boost ATW’s profits down the road.
Meanwhile, ATW currently trades for a dirt-cheap forward P/E of less than 7. That’s significantly lower than its chief rivals.
Midcap Energy Stocks To Buy #2: HollyFrontier (HFC)
Refiners live and die by their margins. If crack spreads are too tight, profits are dwindled down to nothing. Luckily for midcap refiner HollyFrontier (HFC), it’s still enjoying pretty juicy margins on its refined products.
That’s because HFC’s five refineries are all located in the center of the United States, right smack in the middle of West Texas Intermediate crude country. And as we’ve seen, the WTI-Brent crack spread has been quite rich the last few years. That has helped Holly produce some pretty impressive profits.
And with the WTI-Brent spread recently getting wider, HFC should be able to keep churning out those revenues.
Holly should also keep churning out dividends as well.
Since launching in 2011, HFC has managed to return about $2.2 billion worth of cash back to shareholders via dividends and buybacks. The latest was special 50-cent dividend, in addition to upping its regular payout by 6.7%. HFC stock currently yields 2.6% and trades for a forward P/E of less than 10. As far as midcap energy stocks go, HFC is on its way to becoming a dividend champion.
Midcap Energy Stocks To Buy #3: SM Energy Company (SM)
Ask any investor to name the hottest shale formations in the U.S. and odds are the words Bakken and Eagle Ford would be at the top of their lists. Add in the prolific Permian Basin and you have a trifecta of shale oil and natural gas liquids (NGLs) that can power profits for years to come.
Now what if I told you there was a midcap energy stock tapping all three regions with gusto?
Well, SM Energy Company (SM) has exposure to all three as well as the upcoming Wolfcamp. Those hot shale plays should help push SM’s production up around 16% this year. And the fact that SM enjoys liquids rich production will keep the profits coming.
For the latest quarter, SM saw a 31% increase in total operating revenues for the first quarter of 2014 versus the same period a year ago. Profits registered 96 cents per diluted share, beating analysts’ estimates.
But given the company’s exposure, those hefty revenue and profit gains could be just for the beginning for SM Energy and SM stock investors. Meanwhile, its midcap size makes it perfect for a buyout.
Midcap Energy Stocks To Buy #4: Oceaneering International (OII)
It takes a lot of technology and know-how in order to drill in the ultra-deep water of the world. For the energy stocks providing those services, it can mean some huge profits. For Remotely Operated Vehicles (ROVs) specialist Oceaneering International (OII), it can mean record profits.
OII owns 304 ROVs that help E&P firms support undersea drilling, pipeline construction and well completion from the surface. The firm also produces various pieces of undersea drilling hardware for use in deepwater applications. That niche market has allowed OII to continue to rack-up growing and record profits in recent years.
For the first quarter 2014, Oceaneering International managed to generate net income of $91.2 million or 84 cents per share. Revenues clocked in at $840.2 million. That was a 22% gain in earnings per share versus the same period a year ago. That growth in revenue and profits were higher than many of its competitors.
Aside from a rising share price, OII stock investors have been treated to rising dividends as well. The latest increase was a 22.73% jump to its quarterly payout. Shares of OII stock now yield 1.5%.
Midcap Energy Stocks To Buy #5: Ultra Petroleum (UPL)
What a difference a few years can make. After getting killed by low natural gas prices, Ultra Petroleum (UPL) has bounced back with a vengeance. Yet more good times could be in store for the midcap energy stock.
First off, the cold winter and hot spring has increased power consumption across the U.S. That has depleted our natural gas storage reserves, boosting prices higher and higher. Since UPL is predominately a natural gas producer, those higher prices mean money in the bank.
At the same time, most of UPL’s current and future drilling programs are tied to oil. In fact, during the first quarter of this year, UPL managed to see a 145% year-over-year jump in oil production. That growing oil production — along with its higher price — helped drive earnings of 87 cents per share. A year ago, UPL only earned 38 cents.
Add in the oil growth and the rise in natural gas prices, and you have a recipe for great gains in the year ahead.
UPL stock trades for a forward P/E of just 8. That actually makes the midcap energy stock a cheaper bet than buying giant Exxon Mobil (XOM), and an easy pick for one of the best midcap energy stocks.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.