While energy stocks have enjoyed a few bright spots of late, the general bear market in the sector continues to hold tight.
That’s not good news for shorter-term investors hoping for a quick pop, but investors with longer-term timelines — say, five years or so — have a phenomenal buying opportunity amid the current malaise.
In fact, you could even double your money in a few energy stocks if you have five years to spare.
Crude oil prices have swung what you could argue is too low at the current $50 to $60 per barrel range. Just like when oil shot up to $150 per barrel before the Great Recession, a reversion to the mean seems inevitable.
Will that reversion come this year? Probably not. But over the next five? That’s a lot more likely.
A $20 or so bump in the per-barrel price of crude would be enough to push small- and mid-cap energy stocks significantly higher. These companies would benefit not just from a relief rally, but also from the eventual actual profits that higher energy prices would provide.
These five energy stocks in particular have the potential to double investors’ money when oil prices eventually rebound to more “normal” levels.
Energy Stocks That Could Double: Energy XXI (EXXI)
While most energy stocks have been focusing on the deep, deep, deep waters in the Gulf of Mexico, Energy XXI (EXXI) has plowed headfirst into the Gulf’s shallower seas.
Since its founding in 2005, EXXI has done about $5 billion in acquisitions and now owns/operates 10 of the largest oil fields on the Gulf’s shallow shelf. All in all, we’re looking at 217 million barrels of oil equivalent (BOE) in proved reserves.
That’s the good.
The bad is that like many energy stocks, Energy XXI took out a huge pile of debt to pay for all of that, and the current mess in crude oil isn’t helping the situation. EXXI shares have sunk from $24 last summer to roughly $3 today.
But that cleaving is why EXXI could double in the next five years, should the chips fall right.
A major bond holder is working with Energy XXI to extend the maturity times for much of its debts. That will give Energy XXI more wiggle room for crude to come back. Secondly, a recent sale of underwater midstream assets will improve the firm’s liquidity to around $1 billion.
All in all, these are the two biggest albatross hanging around Energy XXI’s neck. Canaccord Genuity expects their removal will help the energy stock’s shares surge by more than 60%, hence its $5 price target.
Add in higher oil prices, and you have an easy double on your hands.
Energy Stocks That Could Double: EOG Resources (EOG)
I hate to beat a dead a horse, but EOG Resources (EOG) is still far and away one of the best energy stocks you can own. Its size and scope in the two cheapest and most prolific regions in U.S. shale — the Eagle Ford and Bakken — provide it with huge reserves, plenty of cash flows and steady production.
In fact, EOG has been making more money with oil at $60 per barrel than it did at $90.
The key: aggressive cost cutting and completing the most efficient wells. EOG Resources didn’t have to keep pumping and pumping, as its financial situation wasn’t nearly as dire as other energy stocks.
And that’s exactly why EOG stock could double over the next five years.
When oil prices rise, EOG can complete already drilled wells and essentially turn on the spigot. That’ll work its way into EOG’s already pretty impressive bottom line. And as the company is able to generate plenty of operating cash, buyouts and other M&A activity could be heading EOG’s way.
All told, the next five years could be very kind to EOG Resources.
Energy Stocks That Could Double: Marathon Oil Corporation (MRO)
Five years is a long time in the market — plenty long enough for Marathon Oil Corporation (MRO) to right the ship and get its share price back on track.
Since spinning off its refining assets into Marathon Petroleum (MPC) back in 2011, MRO’s fortunes have peaked and faded along with lower energy prices.
Marathon Oil was simply cast away in favor of sexier energy stocks. But that’s bargain investors’ gain, as MRO has been making the right moves.
Marathon has been focusing on three core areas that it sees as lower-cost, higher-margin plays among its assets; these include the Eagle Ford and Bakken. Secondly, management has focused on reducing capex costs and shoring up MRO’s balance sheet to survive the current oil-price environment and insure itself against future volatility. Noncore asset sales have helped Marathon raise some extra cash, and helping matters further, MRO has a low cost of capital under its expanded revolving credit line.
As for growth, Marathon’s attractive shale assets will help it improve to cash flow-neutral (backing out dividends) next year and beyond — if oil prices merely stay where they are.
If oil gets back on its feet, MRO will be a lean, mean return machine.
Energy Stocks That Could Double: Transocean (RIG)
The past year hasn’t been so kind to a number of different energy stocks, including those that own deepwater and offshore drilling rigs.
As the largest deepwater rig operator, Transocean (RIG) has suffered more than most. Shares of RIG are down about 65% over the past 52 weeks, including about 10% declines since the start of the year.
That fall is somewhat justified — after all, the collapse in oil prices has strangled deepwater drilling. But what little bounce we’ve already seen in oil prices has energy firms looking to finally start (and finish) multiyear offshore projects.
Thus, I’m very bullish on RIG right now.
Transocean currently has about $20 billion in order backlog — roughly three times its current market cap. Meanwhile, Transocean has more than $2.6 billion in cash and $3 billion in credit available. Plus, RIG should produce about $1 billion in cash flows in 2016, thanks in part to its MLP, Transocean Partners LLC (RIGP). Consider all that, and you have a pretty good case for RIG surviving the current downtrend.
Sometimes the best long-term buys come during periods of extreme pessimism. Transocean certainly has that in spades, but that’s why it still might be one of the best energy stocks to own over the next few years.
Energy Stocks That Could Double: Core Laboratories NV (CLB)
Core Laboratories NV (CLB) is kind of an odd bird in the energy stocks world.
That is, it’s an oil services company, but it’s not a driller, nor is it a provider of rig equipment.
No, CLB calls itself a “reservoir optimization company” — it provides research, technology and specialized equipment designed to optimize oil and natural gas extraction. Simply put: It’s a host of scientists analyzing core samples for hydrocarbon levels. But it’s offerings are complex, running the gamut from lab testing and data mining to patented well-enhancement technologies.
And Core Laboratories’ offerings really do help on the production front. CLB estimates that its Flowprofiler data technology can increase well output by between 40% and 60% (when used with proper well spacing and longer horizontal drilling pads).
In the era of cheaper oil, making sure you are drilling in the right spot and pulling out every bit of energy is vital. That’s why E&P firms will spend a pretty penny on CLB’s offerings — to make sure they’re doing things right. Plus, Core Lab has scare competition in the space (though some majors have their own in-house operations).
As oil rises and E&P firms get more active again, CLB should head back toward its highs from before the energy crash — worth roughly a doubler from here.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.