Top Energy Stocks Overlooked on Wall Street

Having made 1,000 picks to date, I'm officially a Motley Fool CAPS junkie. In real life, I buy and sell stocks sparingly, but CAPS affords me the chance to come out with thumbs blazing, as I dish out liberal doses of "outperform" and "underperform" calls on a daily basis. It's a nice way to temper that trading impulse, and to test out whether you're half as market-savvy as you think you are. Apparently, I'm two-thirds as savvy as I think, judging by my accuracy to date.

In honor of my addiction, I'm running a series of articles on another great benefit of participating in the CAPS community: the discovery of off-the-radar stock ideas. CAPS players unearth the darndest things.

Using the handy new CAPS screener, I searched for highly rated energy stocks with little in the way of a Wall Street following. Here are some of the top results:

A reeling refiner
Calumet gets a special nod for being rather highly regarded, despite having lost more than two-thirds of its value over the past year. Our Income Investor team, holding steady with its recommendation, argues that the pendulum has swung too far.

These aren't the only folks seeing upside at today's prices. An investor group representing Calumet's chairman and other top insiders recently arranged an open-market purchase plan in excess of half a million shares. That news appears to have helped lift shares nearly 40% since the middle of May.

Because Calumet is a refiner, oil is an important raw material for the company. And because Calumet can't raise prices at the same explosive pace at which crude is rising, margin pressure is weighing heavily on results. If you're looking for a really explosive winner among this group of highly rated stocks, your best bet is probably one of the upstream oil and gas producers.

Oh, the places you'll Geo
GeoResources, as one of Leucadia National's smaller natural-resource investments, has crossed my desk before. I've never before taken a closer look at the U.S. onshore player, however. One important distinguishing feature is that GeoResources' reserves were nearly 70% oil at year's end. Also of note is that the company is busy in the North Dakota Bakken formation, through both a joint venture and nominal participations in third-party wells. The latter activity, although informative, won't result in immediate financial gains -- but as we learned in the latest Indiana Jones installment, knowledge is an awesome and powerful thing.

GeoResources has undergone significant merger and acquisition activity over the past year or so. Rather than dilute the shares, of which the management and board are major owners, the company took on a fair bit of debt. The company already paid down $10 million worth in the fourth quarter, an indication that GeoResources' management is serious about maintaining a flexible financial position. I'll be watching this one with interest.

Oil fields further afield
The other two exploration and production companies my screen generated have ventured to far-off places in pursuit of black gold. TransGlobe is active in the Middle East, while VAALCO is focused on West Africa.

Between Egypt and Yemen, TransGlobe has more than 3 million net acres in its portfolio, a massive figure given the company's size. Some of the company's Yemeni assets are operated by Occidental Petroleum (NYSE:OXY), whose decades-long presence in the Middle East makes it an ideal partner. The company's 2008 guidance is for 7,400 barrels of oil equivalent per day -- about $69 million in cash flow. Although production-sharing agreements with foreign governments can be mercurial, TransGlobe appears to be quite reasonably priced, given its asset base and production profile.

VAALCO has assets both on and offshore from Gabon, as well as offshore from Angola. But where TransGlobe appears reasonable, VAALCO looks downright cheap. Production was recently averaging around 22,500 barrels per day -- around three times TransGlobe's full-year target -- yet the two companies' enterprise values (market cap plus net debt) are roughly identical.

No wonder, then, that VAALCO has been involved in a proxy slugfest with hedge fund Nanes Delorme Partners. The fund pushed for a sale of the company and sought to nominate a slate of directors at the upcoming annual meeting. VAALCO responded with a lawsuit alleging misleading tactics. Now a settlement has been reached, in which Nanes Delorme will support current management, while VAALCO has agreed to some corporate-governance enhancements, which include declassifying its board and splitting the roles of president and chief financial officer.

I think this is a pretty ideal outcome. Incumbent management gets to prove itself through the forthcoming wildcat drilling program that's targeting more than 50 million net barrels of potential reserves. If those folks strike out, dissidents will have an easier time shaking up the board come next year's annual meeting.