Are We Crazy or Are These Energy Stocks Screaming Bargains?

Whenever the entire energy sector takes a massive drop, there are a fair share of companies that take big hits to their share price, even if it might not necessarily be warranted. Today, that is especially true in the energy market. While the decline in oil and gas prices has sent the entire sector plunging, there is a handful of companies that have seen their share values get beaten down to levels that seem almost preposterous.

We have a few energy contributors huddled in the corner who have been starting to seriously question their own sanity lately because they see a ton of companies in the space that have seen their shares get beaten down to bargain-basement levels. So we asked them to highlight one company that has them wondering whether they are the crazy ones or these stocks are absolute steals right now. Here's what they had to say.

Jason HallConsidering the spate of bad news over the past few weeks, I would understand why you'd think I'm nuts for increasing my holding in independent producerUltra Petroleum, but that's exactly what I did just last week.

Yeah, I know: China's a mess. Japan is in recession. Canada may be in recession, too. Factor in stubborn U.S. production that just won't slow down and what's looking like more oil set to come out of Iran before the end of the year, and it's doom. Right? Not so fast. Ultra has counted on natural gas for 92% of its production and more than 81% of its revenue through the first half of the year. In other words, all that international stuff doesn't affect the company as much as it does more oil-focused peers. Ultra has also used hedges -- that is, contracts to sell a portion of its production at a pre-agreed price -- to gain predictable cash flows and protect against downside risk. Over the first half, the company realized $3.31/Mcf with its hedges, versus $2.68 without.

Looking at the rest of the year, the company has about 85% of its remaining natural gas production hedged at $3.71/Mcf on average. In short, there's little risk in the short term from low gas prices. Lastly, looking at the long term, drilling activity for natural gas has fallen off sharply in North America. There are 35% fewer gas rigs operating now versus a year ago, and half as many oil rigs, while demand for natural gas remains relatively strong.

Frankly, Ultra may be one of the safest producers to invest in. It's beaten-down, I think, much worse than it should be.

Tyler CroweOver the past couple of months I have been really wondering if I am missing something when looking at Denbury Resources . I can certainly recognize the sentiment that earnings will take a steep drop if oil prices remain low for the next 12 to 18 months and all of Denbury's hedging protection expires. However, when compared to several other companies in the exploration and production space, it has a much more solid footing.

Denbury is unique in the sense that almost all of its oil is produced using enhanced oil recovery by injecting CO2 into older wells that were thought to have produced their last barrels. There are two very distinct advantages to this. First, finding and development costs are much lower than traditional extraction since the oil is already found. Second, once the well has been repressurized with CO2, the decline rates are much lower and slower than what we see with shale wells, which means capital spending to maintain production levels can be much lower. In fact, this past quarter the company was able to fully fund its capital spending, its dividend, and still have enough operational cash left over to pay down $115 million in debt.

With operations that can live within their means and a manageable net debt-to-EBITDA ratio of 2.1 times, it looks as though Denbury will be able to manage the storm of oil prices rather well over the next 18 months without having to make any more drastic changes to its operations. So unless I'm missing something, this company's stock trading at less than half of its tangible book value looks like you could get an awful lot of bang for your buck.

Matt DiLalloI thought about playing the hero and jumping on board with a severely beaten-down oil and gas producer. But I just can't shake the feeling that midstream MLPEnterprise Products Partners is a screaming bargain right now. I don't see a good reason that its units are down more than 20% so far this year. It's a move that has pushed its distribution yield up well over 5%, which is just too compelling to pass up.

I think investors are forgetting the fact that while the commodity market might be in turmoil, Enterprise Products Partners' business model is rock solid. This is a company whose foundation is built upon owning primarily fee-based assets, which provide stable cash flow in any environment. On top of that, the company has one of the highest credit ratings among MLPs thanks to its solid balance sheet. One reason this is the case is that the company doesn't distribute all of its available cash flow to investors and instead has retained $7.1 billion in cash flow over the past five years, which funded the construction of assets limiting its need for additional debt. Furthermore, because it retains so much cash flow, the company's distribution coverage ratio is a robust 1.4 times.

The company also has a very visible backlog of growth projects, with $8.3 billion in projects currently under construction. While that's not quite as large as some of its peers', these are projects actually under construction and not projects the company believes it can build or would like to build.

Add it all up, and I think I would be crazy not to add to my position in Enterprise Products Partners. This is as rock solid a company as one can find in the energy industry, and the recent sell-off looks like a gift from the market.

The article Are We Crazy or Are These Energy Stocks Screaming Bargains? originally appeared on

Jason Hall owns shares of Ultra Petroleum. Matt DiLallo owns shares of Denbury Resources and Enterprise Products Partners. Tyler Crowe owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners and Ultra Petroleum and owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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