The Deepwater Horizon disaster will change the energy sector for good and these companies are poised to benefit. By Andrew Tanzer, Senior Associate Editor June 23, 2010 Just as oil-and-gas stocks were struggling to find their feet, the industry entered a new cloud of uncertainty. Energy stocks plunged on June 22 after the Obama administration said it will appeal a federal judge’s ruling lifting the administration’s six-month moratorium on deep-water drilling, which was imposed in the wake of BP’s massive oil spill.At some point there will be more clarity in the industry, and maybe BP (BP) will even figure out a way to stanch the flow of oil that has been gushing into the Gulf of Mexico for more than two months. In any case, the energy sector won’t be quite the same post-accident. Tom Nelson, co-manager of Guinness Atkinson Global Energy (GAGEX), calls the man-made disaster “an event of seismic proportions” that will lead to tighter health, safety and environmental regulation in the industry, particularly in the promising offshore arena. This implies rising costs for the oil-and-gas industry, which will be passed on to consumers in the form of higher energy prices. Global demand for energy continues to grow, but winners and losers will emerge from the shifting sands. For example, an independent company with a weak balance sheet and heavy dependence on Gulf drilling may have trouble surviving higher operating, regulatory and insurance costs. Conversely, a company with financial strength and energy in the ground that can be obtained relatively easily should benefit from higher prices. Advertisement Here we cite half a dozen energy-stock ideas, ranging from conservative to somewhat speculative. Let’s start with the biggest and most stable of them all, ExxonMobil (XOM). Tina Vital, oil analyst at Standard & Poor’s, likes the oil-and-gas leviathan for its low-cost production, technical expertise, financial strength, skilled allocation of capital, and globally diversified base of production and sales. Exxon, says Ed Maran, co-manager of Thornburg Value Fund (TVFAX), has managed over the years to mute the cyclicality in a cyclical business. It does this, he says, by holding down debt and focusing on long-lived projects with high profit margins, such as a huge liquid-natural-gas deal in Qatar (at last report, cash on Exxon’s balance sheet exceeded total debt outstanding by more than $4 billion). The stock, which closed at $61.10 on June 23, trades at 11 times projected 2010 earnings of $5.73 per share and yields 2.9%. As is often the case, Exxon shares sell at a premium to other big, integrated energy companies. Maran also likes ConocoPhillips (COP), which, at $53.51, yields 4.1% and trades at nine times estimated 2010 earnings of $6.07 per share. Conoco stopped share buybacks and has been selling off non-core assets in order to strengthen its balance sheet. Maran also expects Conoco to benefit from improving refining margins in the U.S. Advertisement When you combine Europe and Big Oil, you have a recipe for cheap stocks. At $48.37, Total (TOT), the French champion, sells at just seven times estimated 2010 earnings of $6.54 per American depositary receipt and yields an enticing 5.8%. Keith Goddard, co-manager of Capital Advisors Growth fund (CIAOX), based in Tulsa, Okla., says that Total is in a better position than most global oil majors to replace energy assets. He figures that it offers a safe income stream in a low-yield world. For a bit more growth potential, consider some exploration-and-production companies with long-lived reserves in the ground and a track record of finding and developing oil and gas resources at low costs. Tim Hartch, co-manager of BBH Core Select Fund (BBTEX), has two picks in this group: EOG Resources (EOG) and Occidental Petroleum (OXY). While big, integrated companies such as Exxon and Total labor to boost output by 2% a year, Hartch thinks EOG and Oxy can expand production by high-single-digit percentages for years to come. If you believe that oil prices are headed up over the next few years, then those reserves and higher output become more valuable. EOG, which was a pioneer in horizontal drilling for natural gas in shale projects in Texas, North Dakota and elsewhere, is now applying horizontal drilling to coax oil out of the same shale projects. Oxy is a master at bringing up more oil and extending the lives of its onshore Texas and California reserves through secondary and tertiary recovery techniques. Advertisement Finally, for something more speculative, consider Anadarko Petroleum (APC), the 25% owner and joint-venture partner with BP in the ill-fated Gulf of Mexico oil well. Anadarko stock fell 4.4% June 23 and, at $39.86, has plummeted 46% since the April 20 Deepwater Horizon rig accident. Capital Advisors’ Goddard says he recently started purchasing Anadarko shares after doing some calculations and noting its attractive assets in the Gulf, off of Western Africa and elsewhere. He estimates that the total cost for the spill will be $45 billion. Anadarko will cough up one-quarter of the bill over many years. Goddard believes that Anadarko’s liability for punitive damages will be capped at $75 million under the rules of the Oil Spill Liability Trust Fund (BP has waived its Trust Fund cap). There’s a 70% chance, in his view, that Anadarko’s stock will be worth $60 in 12 months and a 25% chance that it will reach $75. He thinks there’s only a 5% chance that Anadarko will file for bankruptcy reorganization, a move that would likely wipe out shareholders.