Consider Small Energy Names

One of the trends that I think will play out over the coming years in the energy sector is that small domestic producers will outperform their larger, more geographically diversified peers such as Exxon (XOM) and Chevron (CVX). Not only do they have the potential to be acquired, but they are also poised to grow their production much faster, and will be awarded much higher multiples than the oil majors. There are two main reasons I believe this will happen:

Thanks to new technology, the U.S. and Canada are going through an energy production renaissance. There have been so many finds in natural gas shale area over the past five years that natural gas prices are at decade lows and consumer spending was bolstered over the winter in no small part by lower heating costs. In addition, both manufacturers and the chemical industry are starting to expand domestically driven by lower operating costs enabled by lower energy prices. Finally, coal use is being curtailed drastically as many utilities change over to using natural gas because it is cheaper and cleaner than coal. Oil production has dramatically increased over the past five years as well. To cite but one example, North Dakota has quintupled its oil production (mainly from the Bakken reserve) over the last half decade. Its 500,000 barrels-per-day (bpd) of production makes it a bigger producer than Ecuador, which is an OPEC member. I also believe that North America's lower geopolitical risk will help drive production as well as multiples higher. This is especially true given the increasing hostile environment in other parts of the energy producing world, particularly South America. To cite three recent examples: Argentina looks poised to nationalize its oil giant, YPF, which could have a significant negative impact on the Spanish oil firm Repsol (REP). Brazil is trying to extort $11 billion from Exxon and Transocean (RIG) for a relatively small spill that is still in dispute. This has the potential to sharply curtail investment in the region.  Both Exxon and ConocoPhillips (COP) are still battling Hugo Chavez in Venezuela on that country's prior nationalization of its assets.

Here are two undervalued oil firms whose primary revenue streams are from domestic oil and gas production. Both should benefit from increasing production as well as higher multiples being applied to its earnings....322 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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