This week we’re unwrapping three new picks for The Energy Strategist portfolios, continuing the promised renovation that will play out over the next few issues.

Our choices represent a lot of hard work and we’re excited to share the results and the considerable upside with subscribers.

Of course, failure is a possibility as well, as in any business or investment. That’s why is comforting that each of these stocks fronts a terrific operation led by top-notch management. Experience and a successful performance record matter a great deal, and our newest portfolio additions have these qualities in abundance.

The new picks also answer the question asked with some regularity after the heavy portfolio pruning carried out in the last issue: “Why did you drop that stock?” (See “We’re Clearing the Decks,” TES 190.)

In some cases, the deletions of long-standing positions reflected recent problems that had come to light. But, as often as not, the securities purged were guilty of nothing worse than not offering the best long-term opportunities for energy investors, in our judgment.

Every investor works with limited capital and a finite attention span, resources that must be carefully husbanded and lavished only on the best ideas. Here are some of our best, and we believe they are demonstrably superior to those we’ve recently swept out.

First up is Continental Resources (NYSE: CLR), the top driller in the Bakken shale formation that’s driving the domestic drilling boom and might one day turn the US into a crude exporter. Continental is led by the legendary wildcatter Harold Hamm, an Oklahoman raised in grinding poverty who’s become a multi-billionaire by dint of an uncanny nose for the next big oil play, controlled financial and political aggression and faith in his own analyses.

Compelling as Hamm’s story is, Continental’s is even better. The company is the fastest-growing oil producer of its size, and stands to benefit disproportionately from the drilling innovations and infrastructure improvements unlocking the US shale potential. All energy investors are by definition bullish on the industry, and Continental offers unmatched upside tied to the development of the industry’s most promising new find.

Production grew 58 percent in fiscal 2012 and is projected by the company to rise another 35 to 40 percent this year en route to a promised tripling by 2017. Proven reserves rose 54 percent last year and Continental predicts they will roughly double over the next five years.

This hasn’t been profitless growth either; net income has tripled in two years while earnings per share are slated to jump 46 percent in 2013, based on the analysts consensus.

Continental isn’t just a play on high oil prices or the continuing buildout of the transportation infrastructure to and from the Bakken. It’s also a bet on Continental’s world-class shale drilling expertise, which will eventually allow it to drill much deeper into the rock and to more densely pack its wells atop the best deposits on its acreage.

Bakken crude is unusually light and sulfur-free, promising more profit to the refiners able to access it. So as transportation options improve, it’s likely to outperform the inferior West Texas Intermediate, perhaps considerably.


Source: Continental Resources

The stock currently fetches 18 times projected fiscal 2013 earnings, steep for an energy stock but not for one consistently delivering the best growth in the industry. In fact, it would be awfully hard to be bullish on energy overall and not to be especially bullish about Continental’s prospects.

Fortunately, there’s no need. Drilling costs should decline as Continental rationalized its acreage, propping up the already excellent cash margins. Cash flow is likely to keep pace with the heady production gains.

A global recession would pressure this growth story in a hurry, so the risks are higher than they would be for a less aggressive company. But the upside exposure to higher oil prices and further development of the Bakken shale is truly extraordinary. Buy Continental Resources below $110. We’re adding it to the Aggressive portfolio.

Our second pick is another company with Oklahoma roots and favorable exposure to the shale boom. Helmerich & Payne (NYSE: HP) is the leading contract driller in the lower 48 states, with the newest and most technologically advanced land rig fleet that’s helped double its market share over the last decade.

The shifts toward ever more challenging drilling techniques and the current market preference  for oil over natural gas both play to H&P’s competitive advantages over rivals.



Source: Helmerich & Payne

Revenue rose 24 percent in fiscal 2012, while net income per share jumped 34 percent. Yet the company, which carries only token debt, is currently being valued at barely 5 times its trailing cash flow.    

Rig utilization rose to 89 percent in 2012 despite a downturn late in the fiscal year, as producers responded to crude’s temporary drop. More recently, in reporting Street-beating first-quarter results, the company said “E&P spending plans appear poised for increases.”

H&P did plenty of cost-cutting during last year’s drilling slowdown by natural gas producers; as spending recovers the gains should flow to its bottom line. And it’s poised to continue to profit from the shale oil boom on US soil.

Buy Helmerich & Payne below $82. We’re adding it to the Conservative portfolio.

With this week’s third and final pick, we look beyond the indisputable attractions of the domestic shale boom to the lasting challenge of finding and managing energy deposits by, literally, sounding out the Earth to identify the telltale signs of hydrocarbons. Geospace Technologies (NasdaqGS: GEOS) is an industry leader in the design and manufacture of such seismic equipment, especially the gizmos not attached to bulky and expensive cables.


Geospace seismic recorders in action Source: Geospace


This is a red-hot small-cap stock that has more than doubled from its August lows to the current $1.3 billion market capitalization. But unlike many of the small-cap momentum plays, Geospace has real growth: sales were recently up 80 percent year-over-year thanks to a landmark $160 million contract with Norway’s Statoil (NYSE: STO) for seismic reservoir monitoring of two big offshore fields. Net income was up 150 percent, and even more impressively, Geospace has posted a positive pre-tax return on shareholder equity in every year since 2006, including the bust of 2009. Its average annual pre-tax return on shareholder equity over that span is 23 percent.

The company has experienced and stable management, strong institutional backing and a valuation that, at 16 times this year’s estimated earnings, is more than reasonable, especially given the potential for further growth. The GSX wireless acquisition system is rapidly winning over new customers and the Statoil contract could open up additional opportunities with major offshore producers.

Buy Geospace Technologies below $125. We’re adding it to the Growth portfolio.