In a rapid turn of events, the Obama administration will now dole out $8 billion in a federal loan-guarantee program aimed at reducing energy companies' coal dependency.
The decision comes after last week the Obama administration instructed the United States Environmental Protection Agency (:EPA) to draft new rules to limit emissions at U.S. coal-fired power plants. With directives for setting up more stringent carbon pollution standards for active coal plants, the move would make a large number of coal-fired plants unviable.
As of now, approximately 40% of U.S. electricity is generated at coal-fired plants. A Republican backlash in the form of Offshore Energy and Jobs Act bill to unshackle U.S. offshore areas promptly followed.
This is making us apprehensive, as we feel tax hikes and spending declines are expected to slow growth in the ongoing fiscal year. In recent times, higher production in the U.S. energy sector has resulted in lower energy bills and in turn reduced imports. Also, the widespread adoption of new drilling and exploring techniques has increased domestic supply and lowered the relative price of natural gas in the U.S. This cost advantage aided economic recovery.
In the case of petrochemicals, the low relative price of natural gas is a significant cost advantage for a range of products including fertilizers, solvents, and plastics. This development is not only encouraging investments in exploration, production and petrochemicals, but is also benefiting manufacturers that are positioned to take advantage of lower energy costs. More generally, it serves as an important prop for U.S. exports, and a foil to the import of foreign produced goods.
However, in light of the ongoing energy tussle, we feel the momentum of economic recovery may lose some steam. In particular, it may be a good time to add a few strong energy stocks to your investment portfolio. We think the following four energy stocks are future gainers given their attractive valuation and favorable Zacks Rank:
Oasis Petroleum Inc. (OAS): This independent oil exploration and production company currently holds a Zacks Rank #1 (Strong Buy). The stock currently trades at a forward P/E of 13.6x and a P/B of 4.5x. The stock also has a long-term earnings growth expectation of 32.5%.
Hornbeck Offshore Services, Inc. (HOS): This Zacks Rank #1 (Strong Buy) oilfield services company also deserves investors’ attention. The stock currently trades at a forward P/E of 16.4x and a P/B of 1.7x. The long-term earnings growth expectation for the stock is 25.0%.
Delek Logistics Partners, LP (DKL): The pipeline operator currently carries a Zacks Rank #1 (Strong Buy). With a forward P/E of 17.1x and a P/B of 3.5x, alongside a long-term earnings expectation of 11.0, it automatically places itself on our hot list.
Alliance Resource Partners LP (ARLP): Lastly, in times of doldrums over coal, this coal producer with a Zacks Rank #1 (Strong Buy) comes foremost to our attention. The stock currently trades at a forward P/E of 11.0x and a P/B of 3.6x. It is expected to witness a long-term earnings growth rate of of 6.0%.
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