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.
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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
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.