The hunt is on. With oil prices below $80 per barrel and natural gas prices still at depressed levels, I've been heavily researching the best stocks in this sector, hoping to scoop up bargain stocks and ride the next wave of surging energy prices.
Last month, I highlighted that energy firm Chesapeake Energy (NYSE: CHK) was a hated stock but worth considering as an investment. It is one of the largest pure plays in the domestic natural gas industry and has some of the most appealing production assets out there. A couple of billionaire investors have also made recent investments.
I still believe Chesapeake is undervalued, but my estimate of potential gains was pretty wide at between 40% and 135%. This is because there is a lot of uncertainty regarding Chesapeake. Though it has great assets, the rapid plummet in natural gas prices means it currently has a funding gap between what it would like to spend to explore for gas and what it will generate in profits this year. The company also almost blew up in 2008 when credit markets tightened and it was stuck with billions in planned spending.
Chesapeake is what I would qualify as a high-risk, high-potential reward stock. Investors who would like to sleep a bit more easily at night might want to consider a much safer rival. In fact, its upside is just as compelling and the downside risk is lower, in my estimation.
Apache Corp. (NYSE: APA)
has an explicit strategy to develop a balanced portfolio of energy assets. This means diversifying risk by geography, through a mix of oil and natural gas-producing properties, and reserve life. For instance, it looks for and extracts oil and gas in onshore and offshore locations. It is a big player in the United States, but also has sizeable assets in Egypt and elsewhere.
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Apache has also been active so this year in acquiring new assets. In January, it announced the $439 million purchase of a 49% interest in an ammonia fertilizer plant in Australia, as well as a multi-billion dollar purchase of private firm Cordillera Energy Partners and its Central Anadarko basin assets. Past purchases have been from energy titans Exxon Mobil (NYSE: XOM) and BP (NYSE: BP), and gives me a great comfort level that the assets purchased are quality and have high production potential.
Apache describes its approach as a relentless pursuit of opportunity and seeks to do so by controlling costs at the same time. The company has a solid track record of acquiring existing exploration and production properties and exploiting them to their fullest potential.