Energy Stocks That Should Double (VLO, CHK, FSLR, COP, BHI)

This week 24/7 Wall St. is picking several stocks from major sectors that are likely to double off of their lows.  The time frame is by the end of 2010, which is meant to coincide with some form of economic recovery next year.  This is not based on a sharp turn up in the economy. A number of the credit and financial issues facing the markets will be in place for the near-term or longer.  The other assumption used for choosing the stocks is a market bottom of roughly 600 on the S&P 500 Index.

In the energy sector, we have outlined the assumptions and the reasons for Baker Hughes Inc. (NYSE: BHI), Chesapeake Energy Corporation (NYSE: CHK), ConocoPhillips (NYSE: COP), First Solar, Inc. (NASDAQ: FSLR), and Valero Energy Corp. (NYSE: VLO).

The old line energy sector is a tough call because the Obama administration is considering many policies which could hurt it.  The cap-and-trade policy for carbon emissions remains an unresolved issue.  The last key issue with energy stocks, and what may be more of the case with alternative energy stocks, is that their stocks generally follow oil prices.  If no recovery comes in the global economy, there is unlikely to be any great move higher in the price of oil… But there is always the “geopolitical risk” implied call option in the sector.

Baker Hughes Inc. (NYSE: BHI) is one of the lagging oil services operators.  It is well diversified away from the U.S. with operations in almost 100 nations  in most aspects of the oil and gas sector.  It has performed worse than Schlumberger (NYSE: SLB) and the Oil Services HOLDRs (AMEX: OIH) over the last two years, and has fallen more than Schlumberger over the last year.  What makes Baker Hughes an interesting play is that its market cap is under $9 billion now that it has sold off so much.  It releases regular well and rig data, which shows an industry wide decline has been in full force as oil prices fell from more than $100 to under $40 per barrel before this last recovery.  We do not trust the analyst estimates for 2009 and 2010 because of their dependence on oil prices, but if those estimates for $2.95 EPS for 2009 and $3.05 for 2010  are hit, then the stock trades at less than 10-times forward earnings today.

Does it matter that oil workers in Houston thought this one might be acquired back when times were good?  What is important is that estimates were north of $5.00 EPS less than 90 days ago.  Last year, it traded north of $90.00 and flirted with $100.00 in late 2007.  For Baker Hughes to double off the lows seen already, its  stock would have to rise to $48.80.

Chesapeake Energy Corporation (NYSE: CHK) is the largest of the independent gas exploration and production companies in the U.S.  The company has not gone without its own problems, and the great expansion plans in the big four nat-gas shale plays have been pared down.  It has also raised more than $2 billion from securities sales in the last 60 days, and that is before tallying up its asset sales.  Like many analyst estimates, these have been reduced sharply and are probably only good for using as a rough guide ahead at best.

But with estimates at $2.14 EPS for 2009 and $2.99 EPS for 2010, there is room for this stock to run before price and value become a real issue.  The stock was also excessively punished over CEO Aubrey McClendon being forced out via margin calls of almost all of his stock.  This traded as high as $74.00 last year after a monumenal run-up.  There have also been many rumors which have not panned out, that BP plc (NYSE: BP) and other integrated energy players might be interested in acquiring it.  For it to double off of the late 2008 lows under $10.00, the stock would only have to go to $19.68.  But the real base level that was seen when this wasn’t tanking relentlessly was around $13.70.  Technically, a “double from the lows” would be that $19.68, although more realistically it is closer to what would be $27.40 if you smooth out the lows.

ConocoPhillips (NYSE: COP) is not your average major player of the integrated energy companies with global operations.  It has fallen more over the last year than both Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), and has even underperformed an unattractive and problematic BP plc (NYSE: BP).  Warren Buffett has been a huge investor in this company, painfully so.  Its last earnings were atrocious as charges took the net earnings to a loss of some $31 billion.  That is more than a black cloud.  But it also raised $6 billion in securities sales.  Shares fell by almost one-third since then.  ConocoPhillips was a $95.00 stock last year.  Shares currently trade around $37.00 and for it to double from lows it would need to see a share price of roughly $68.00.  Believe it or not, for this stock to double it would be trading at roughly the same percentage off of highs that Exxon Mobil’s stock trades at today.

First Solar, Inc. (NASDAQ: FSLR) is the ultimate Obama-stock.  Unlike the other oil stocks, you could also make the case that First Solar could also head much lower.  It was the darling of green energy investors which ran up over 10-fold to well over $300.00 from the end of 2006 when it came public into the highs of 2008.  But the performance has been so awful that some traders are calling it “First Loser” today.  The company  is at a crossroads right now as it faces slowing orders, order delays, customer credit issues, and an awful economy.  It has even gone out and begun a customer financing initiative.  But it is a US-based solar player involved in many ongoing projects and would stand to possible benefit the most with new Obama legislation.  If you think this one is merely just based upon the sell-off, there are many large solar stocks which are off over 80% and some over 90% from their highs.  Some of the smaller players could rally more than 100% or 200% because they are down so much.  A technical double from lows of $85.28 in First Solar would be $170.56.  But more recently this one based out right around a $101.00. So a double from that level would be round $200.00 for rounding purposes.

Valero Energy Corp. (NYSE: VLO) is a very different than traditional oil companies because it is a refiner and retailer.  On the regulatory side of the equation, it might actually win as a refiner.  It will face carbon tax hurdles like all players, but bringing a new refinery online was more difficult during the Bush administration.

So how many new oil and gas refineries will face Valero as a competitor?  Not many.  This company also does better when oil prices are stable like they have been for the last 3 months.  When prices rise too fast it is bad, and when prices fall too fast it is bad.  The company has opportunistically sold off refinery and that could happen again.  The refinery operations almost always have an asterisk for “unplanned maintenance days” with earnings, and its earnings multiple is never a high one.   This traded as high as $55.00 over the last 52-weeks, but it also traded north of $70.00 in 2007 and early 2008.  A double from recent lows under $15.00 would take Valero to just under $28.00.  While the stock is back around $17.00 now, it was actually back up above $25.00 as recently as January.

Again, these possible doubles by the end of 2010 are dependent upon the recovery having started by then.  Higher oil prices will help, but even stability may allow some of these to at least run up considerably from these recent lows.

JON C. OGG