3 Forgotten Energy Stocks That Could Fatten Your Wallet

If you started the year with three wishes and one of them was for more consistency from the energy sector, you wasted a wish.

Although many energy stocks are up this year, by double-digits in some cases, others are flat and still others are down (also by double-digits in some cases). Basically, the sector is all over the place.

The stock of domestic oil and gas giant ConcoPhillips (NYSE: COP), for example, has gained about +30% so far this year. Meanwhile, shares of exploration and production firm Devon Energy (NYSE: DVN) have gone pretty much nowhere. Brazilian energy behemoth Petroleo Brasileiro (NYSE: PBR) has seen its stock fall nearly -30%. [Click here for my colleague Ryan Fuhrmann’s views on “Petrobras,” which he thinks could become the world’s first $1 trillion company.]

This phenomenon is common in the earliest stages of economic recovery — just where we are now — and you should welcome it. It offers rare chances to buy great stocks cheap, with the potential for mouth-watering long-term returns.

I’ve found three stocks in the energy sector that fill that bill quite nicely: Noble Corp. (NYSE: NE), Total (NYSE: TOT) and Ultra Petroleum (NYSE: UPL).

A full recovery next year
Noble has the distinction of being one of the sector’s double-digit losers, dropping about -15% so far this year. The main reason: during the drilling moratorium in the Gulf of Mexico, earnings suffered greatly, falling -43% and -79%, respectively, in the second and third quarters. Noble generates much of its revenue in the Gulf by providing offshore drilling services to the oil and gas industry.

But the stock could easily recover much or all of this year’s loss by the end of 2011 and rise at least +90% through 2016. That’s because drilling has resumed in the Gulf and Noble has a contract backlog worth up to $10 billion, so earnings should dramatically improve. Indeed, analysts project the company’s five-year growth rate will approach +14% annually.

Importantly, Noble has an especially well-maintained rig fleet, high customer satisfaction ratings and an excellent safety record. After a disaster like the Gulf oil spill, its strong reputation will mean a lot going forward.

A top-notch French company
Shares of French oil giant Total have also receded about -15% year-to-date. But the problem isn’t the company, it’s the euro. Sovereign debt problems in Europe and the possibility of more bailouts like the one Ireland recently received have hurt the euro. That, in turn, has hurt Total, since it reports results and pays dividends in euros.

Nevertheless, analysts predict the stock will appreciate by at least +45% and maintain its nearly 5% yield during the next three or four years. Weak euro aside, Total is a top-notch oil and gas company with a profitable history and plans for a bright future.

Those plans include lots of exploration for new fields to drive long-term growth and hedge against declining production at existing fields. Already, West Africa and Asia have yielded promising new discoveries, and potentially lucrative projects are being explored in the North Sea and Middle East.

Total is exploiting a key competitive advantage in the oil sands of Canada, too — a superior ability to develop tougher fields like oil sands, thanks to prior experience with similar fields in Venezuela.

A fast-growing mid-cap
Oil and gas exploration and production firm Ultra Petroleum has by far the most exciting return potential of the three stocks profiled here, despite going virtually nowhere this year. Earnings for this fast-growing mid-cap are projected to rise by +18% to +23% annually for the next four or five years. Its stock could return at least +120% during that time — perhaps much more if natural gas goes above $5.40 per thousand cubic feet.

A key development that makes such estimates feasible is the recent acquisition of valuable natural gas fields in the Marcellus Shale of Pennsylvania. Ultra Petroleum now has nearly 500,000 acres and 31 productive wells there, with many more planned.

The Marcellus assets are excellent additions to existing and already highly productive operations in Wyoming’s Green River Basin. It also helps immensely that, at roughly $1.20 per thousand cubic feet, Ultra Petroleum’s production costs are among the lowest in the industry — a trend that should continue for at least a few more years.

Assuming costs stay low and natural gas prices get to around $5.00 per thousand cubic feet pretty soon, earnings before interest, taxes, depreciation, amortization and exploration expenses (EBITDAX) could top $1.1 billion next year. That’s an estimated +45% gain from this year’s EBITDAX.

Action to Take –> Take advantage of a rare chance to buy three superior energy stocks cheap: Noble, Total and Ultra Petroleum. Their wallet-fattening potential is great.

Remember, though, energy stocks like these can be volatile, especially Ultra Petroleum. And unforeseen weakness in energy prices could deal a serious blow to any of them.