Now is the time to be looking at energy stocks. Oil, natural gas, and even uranium are possibly in extreme bargain territory. Just be careful — the devil is in the details.
If you want to capitalize on next year’s hottest energy stocks, pay close attention to the list below. The last company on this list is an opportunity no one is looking at.
Follow Warren Buffett
Earlier this year, Warren Buffett’s Berkshire Hathaway took a 10.8 million share stake in Suncor Energy (TSX:SU)(NYSE:SU). For many analysts and investors, it signaled a renewed optimism in the troubled Canadian energy sector. Here’s the catch: Suncor has a major advantage versus its competitors.
“Suncor has a strong downstream operation, which financially benefits from oil bottlenecks,” explains an analyst at Manulife. “And that is unique to Suncor, which you can’t get with many other companies in the energy space.”
Having a downstream operation makes Suncor a fully integrated oil company. It not only drills and produces its own oil, but it also transports, refines, and sells the final product. That’s an important advantage when oil prices swoon. That’s because refining margins often rise during falling oil prices, offsetting declining profitability for the upstream segment. Buffett appears confident that this structural advantage will help Suncor outperform the industry for years to come.
Be the contrarian
Encana (TSX:ECA)(NYSE:ECA) is trading at historic lows, despite a huge rebound in fundamentals. Management has refocused the company to be more of an oil producer than a natural gas producer. That shift has brought renewed profitability and the promise of massive cash flow. Meanwhile, the market has refused to reward the stock for a major turnaround in prospects.
Executives anticipate generating free cash flow for the second year in a row. Next year is expected to remain free cash flow positive. To kickstart its share price, management has instituted a $1.25 billion stock buyback. “We see compelling value in Encana’s stock today,” says CEO Douglas Suttles. “In fact, we strongly believe that buying our own equity is an incredible value.”
As I wrote previously, the net asset value of Encana could be between $10 and $15 per share. If true, management is investing shareholder capital at an immediate 100% to 200% return.
Look the other way
Have you ever heard of Uranium Participation (TSX:U)? Likely not, but that’s why the stock is so compelling. This stock is so under-followed that it could be a screaming buy. Just make sure to allocate your position properly.
Uranium Participation simply buys and stores uranium — the kind used to generate nuclear energy. It’s a simple business model that gives you direct exposure to pricing swings in uranium. This is a great non-correlated hedge that could outperform in a big way if a recession hits — especially if uranium prices shoot higher.
Management believes that the supply hangover from previous uranium bull cycle “is coming to an end, and has been acting as a lifeline to high-cost mines.” Once these mines drop off the supply curve, prices could surge. That could double the value of the company’s inventory in a matter of months.
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The Motley Fool owns shares of Berkshire Hathaway (B shares) and has the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares). Fool contributor Ryan Vanzo has no position in any stocks mentioned.