One of the
best ways to identify sectors that are undervalued, with huge rebound potential
over the next few years, is to track the activities of private equity firms.
These investment
funds tend to be long-term holders of companies and assets that are purchased
when the sector is out of favor or financially troubled. Their focus on
valuation and long holding periods are among the chief reasons that private
equity and buyout funds have consistently been among the top performing
investments over the past three decades.
Right now,
private equity funds are becoming very interested in the energy sector. Kohlberg Kravis Roberts (NYSE: KKR) just closed a $2 billion fund to
invest in North American energy companies. According to the Preqin research
firm, PE funds focusing on energy raised over $27 billion last year. And in a
recent poll conducted by Ernst and Young, 77 percent of executives surveyed
said they expect to see increased private equity interest in North American oil
and gas deals.
The co-chair of
industry leader Carlyle Group (NASDAQ: CG) recently spoke at the SuperReturn PE
conference in Berlin — and identified energy as one his firms preferred areas
for new investment. “I think carbon-related energy is a great
opportunity,” he told investors, “because of what is going on in the
United States, the energy revolution and the enormous demand for energy in the
emerging markets.”
Individual
investors can take advantage of this insight, because oil and gas-related
stocks are out of favor on Wall Street and have lagged far behind the strong
rally in the stock market. Concerns about a still-weak global economy and an
oversupply of natural gas in the United States have kept pressure on
energy-related companies, and many of those stocks now trade at bargain levels.
Swift Energy (NYSE: SFY) is the cheapest North American oil
and gas company right now. The company has not been able to get its mix of oil
and gas reworked in favor of more profitable oil and natural gas liquids as
quickly as investors had hoped — and the stock has been pummeled, falling by
30 percent in the past year. The company owns some very attractive properties
in the booming oil rich Eagle Ford shale fields, and the stock trades at just
40 percent of book value at the current price.
Investors with a
private equity-like time frame should be richly rewarded, as conditions improve for this company over the next
few years.
WPX Energy (NYSE: WPX) was spun off from Williams Companies (NYSE: WMB) two years ago, and is focusing on
developing its oil and gas assets in North Dakota, Colorado and New Mexico. The
company has also been hit by the weak pricing environment for natural gas, and
the stock is down about 11 percent so far this year.
At the
current price the stock trades at just 70 percent of tangible book value right
now. They have a strong presence in the Bakken and Marcellus shale fields, and
the stock should rebound nicely in the years ahead as the natural gas market improves.
One stock that may
not show up on investors’ screens is EXCO Resources (NYSE: XCO). The company is not trading below
book value, but it is well below the $20 a share buyout offer made for the
company back in 2011. They primarily focus on natural gas.
The company had
approximately 70,000 net acres in the Haynesville and Bossier shale formations,
47,800 net acres in South Texas region for the Eagle Ford shale formation and
145,000 net acres in Appalachia region prospective for the Marcellus shale
formation. The real story here is not just what they own but who owns their
stock.
Investors Wilbur
Ross, Howard Marks and Prem Watsa have all owned the stock for some time, and
increased their position by a substantial amount in the recent rights offering.
Combined, the three legendary value and distressed investors own almost 30
percent of the company.
Private
equity money is flowing into the North American oil and gas sector. Although
natural gas pricing has been weak, that should improve over the next few years
— as it becomes a larger part of the discussion about U.S. energy independence
and cleaner fuels. Following the long-term money into the sector and picking up
assets at large discounts to their book and intrinsic value should be very
profitable for patient investors.
Read more
Benzinga.com small-cap articles: http://www.benzinga.com/news/small-cap
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and the opinions contained therein do not necessarily reflect
those of Smallcappower. Smallcappower does not endorse any investment
advice provided by these third-party contributors. Please consult
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