It was a horrible year for the energy sector in 2012. With the exception of utilities, the energy sector had the worst performance of any sub-sector in the S&P 500. Crude oil inventories stood at record levels compared to the average over the past 28 years. The International Energy Agency (IEA) predicts the United States will import only 3.4 million barrels of oil per day by 2035. What this tells me is that investors might want to focus on energy producers right here in the U.S. Based on this reality, here are my three energy stocks to watch in 2013.

Guide To Oil And Gas Plays in North America: We've got your comprehensive guide to oil and gas shales in North America.

Anadarko Petroleum (NYSE:APC)
America is the world's largest producer of natural gas. In 2011, it produced 23,000 billion cubic feet of the stuff. America's power producers are switching from dirty coal to clean natural gas, which is exactly the opposite what's happening in Europe. Anadarko produced 2.5 billion cubic feet of natural gas in the first six months of 2012 making it the third largest producer of U.S. natural gas behind only Exxon Mobil (NYSE:XOM) and Chesapeake Energy (NYSE:CHK). Anadarko generates approximately 90% of revenue in the U.S. although its greatest potential lies off the coast of Mozambique, where its exploration has identified a natural gas find capable of supplying in excess of 10 million tons per year of liquefied natural gas (LNG). Anadarko isn't an LNG specialist and most likely will require partners to finance the capital costs of exploiting the reserves. Once production begins, most of the LNG will be sold to customers in Asia. In 2013, look for Anadarko to benefit from rising natural gas prices as demand begins to be better matched to supply.

SEE: Natural Gas Industry: An Investment Guide

Loews (NYSE:L)
This holding company is one of the best long-term investments you could ever own. Controlled by the Tisch family, they've earned their stripes over the years by buying assets on the cheap and patiently waiting for the markets to recognize the intrinsic value of those assets. Three of its holdings, one of which is privately owned, are energy related. The first is Diamond Offshore Drilling (NYSE:DO), which owns and operates one of the world's largest fleet of offshore drilling rigs. Loews owns 50.4% of the company and although revenues and earnings suffered in 2012, its future appears strong given all the offshore drilling that's taking place around the world. With over $1.3 billion in EBITDA earnings heading into 2013, the fact that it has been able to sign a contract for its Ocean Endeavor 10,000-feet rig that ups the daily rate from $285,000 to $505,000 suggests that the offshore drilling business is picking up steam; Diamond Offshore looks ready to take advantage of the changing tide.

As for Boardwalk Pipeline Partners (NYSE:BWP), it operates natural gas pipelines in the U.S. transporting about 10% of the nation's natural gas on an annual basis. Although it generates just 6% of Loews' overall net income, it does so on a consistent basis. Personally, I like the natural gas tie-in. Lastly, it owns 100% of privately operated HighMount Exploration and Production, a Texas-based company that produces natural gas, LNG and oil in Texas and Oklahoma. In 2012, as a result of lower natural gas prices, it's had to take large impairment charges on its natural gas revenue. I'd expect its situation to improve in 2013. Loews has increased its book value per share by approximately 9.5% on an annualized basis over the past five years. Owning its stock instead of the energy-related holdings directly allows you to benefit from its other holdings at the same time.

SEE: 5 Common Trading Multiples used In Oil And Gas Valuation

Precision Drilling (NYSE:PDS)
Dahlman Rose, an investment bank specializing in natural resources, upgraded the oil services industry in November 2012; one of the prime recipients of this upgrade was Precision Drilling, Canada's largest oilfield services company. Dahlman Rose expects North American exploration and production to increase by 11% in 2013 to $334 billion, led by a big increase from natural gas. The investment banker believes land drillers like Precision are selling at a historically low multiple of 1.1 times tangible book value compared to the historical norm of two times tangible book value. Heading into 2013, Precision's stock's dropped a significant amount and sits at one of its lowest levels in the past two years. Despite reduced demand for its services in 2012, CEO Kevin Neveu pointed out in October that, "PDS is seeing increased long-term contracts for upgraded and new rigs." Rising natural gas prices should increase the industry's rig utilization rate to around 85%, naturally increasing Precision's revenues and profits. This could be an easy double in 2013.

The Bottom Line
Natural gas leads the way in 2013. These three and any other stocks related to natural gas will surely provide some fireworks in the coming year.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing Basics

    Learn How To Trade Gold In 4 Steps

    Trading spot gold or gold futures, equities and options isn’t hard to learn, but the activity requires skill sets unique to these markets.
  5. Economics

    The Effect of Fed Fund Rate Hikes on Gold

    Explore the historical relationship between interest rate increases and the price of gold, and consider what effect a fed funds rate hike might have on gold.
  6. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  7. Savings

    Easy Ways to Go Green and Stay Budget Friendly

    Social entrepreneurs recruit "skeptics" to team green, by providing economically efficient products and services that minimize consumers' carbon footprint.
  8. Investing

    Top Investment Banks In The Energy Industry

    Many global Investment banks are highly involved in the energy industry, but there are also some smaller banks and boutiques that are strong players.
  9. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  10. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!