Double Shale Play in Energy Approaches: ECA & CLR

No sector has escaped the economic calamity since the stock market peaked twenty months ago.  The Bush-Obama stimulus plans are now reflating stocks.  Commodity-related sectors typically thrive in these conditions.  Could energy once again be in the spotlight?

Estimates suggest 90% of our energy consumption still comes from non-renewable resources.  As hip as green is, most of us still put unleaded gas into our cars and turn on lights powered by coal-generated facilities.  Driving a Prius may get you invited to cocktail parties, but owning oil royalties can pay your mortgage. 

That’s why we’re looking for good entry points on two energy stocks.  The first one we like is EnCana Corporation (ECA).  EnCana is a large-cap, Canadian energy company that produces natural gas and oil.  They’re looking for a partner to develop the Texas/Louisiana Haynesville Shale acreage, highlighting their strategic direction as an energy producer.  Canada’s Financial Post pointed out other reasons ECA looks attractive.

“We tapped into the Google Finance stock screener to sift through 2,824 companies, highlighting those with a market capitalization of $10-billion or more, a price/earnings ratio of no more than 10, a dividend yield of at least 2%, a net profit margin of at least 20% and five-year earnings per share growth rate of at least 20%.  The site spat out a list of five companies, including EnCana.  EnCana also popped up when we keyed in a set of characteristics focusing on companies with easily managed debt levels, and on a third list when we searched for large-cap stocks whose shares were down at least 40% over the past year.”

Natural gas prices rebounded strongly in May only to show signs this week of rolling back over again.  A battle is underway: the lower energy demand of a lousy economy vs. the threat of a currency crisis and continued monetization of the nation’s debt.  Gas prices appear ready to move much higher if the “green shoots” take root.  However, if deflation returns energy prices could collapse.  That’s one of the reasons why EnCana stock is unable to break above resistance around $57.  There appears to be good support in the low $50’s, so a reasonable purchase price could be at hand after another day like today. 

The other “shale play” we like is Continental Resources Incorporated (CLR) because of their enormous stake in the Bakken Shale.  Located on the North Dakota/Montana border and extending into Canada, the Bakken Shale is oil-rich.  USGS estimates suggest as much as 4.3 billion barrels may be recoverable on the US side.  Continental Resources has 581,000 acres under lease.  They’re not the only ones exploring the Bakken Formation, but the near-billion dollar company is well positioned for healthy production in the area. 

As energy prices rose in recent weeks, CLR has gone along for the ride.  Can they sustain the trend if oil pulls back into the $50’s?  Because of CLR’s unique position in this sector, we expect it to outperform in an energy bull market.  CLR’s recent breakout failed, so you might try to buy it around $26.00.

If you’re looking for a couple of unique energy shale plays, go with natural gas giant ECA and Bakken Shale producer CLR.