Midyear Review of Our 5 Top Energy Stocks for 2012

At the end of 2011 some of our analysts picked five top energy stocks for 2012. Let me tell you, we could have done better. Not one, not two, not three, but all five of our picks have underperformed the S&P 500 as we pass the halfway mark. We have a lot of catchup to do if these are going to be the top energy stocks of 2012.

BTU Chart

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So what happened with these picks? I'll go through the big picture in order from best to worst performer on the year.

Kinder Morgan
For a portion of the year, Kinder Morgan (NYSE: KMI  ) did outperform the market. The stock was up as much as 20% but the falling price of oil and natural gas eventually caught up with the company. As a pipeline owner Kinder Morgan isn't as directly affected by oil and gas prices as other companies, but the indirect effect is lower throughput in its pipelines. Natural gas companies have begun to slow down drilling and this will make its way to Kinder Morgan eventually.

I wouldn't give up on this pipeline company, though. It still sports a 3.9% dividend yield and a strong competitive moat and will benefit from the rapidly rising production of domestic energy.

Schlumberger
As a company that offers services to drillers around the world, the slowdown in natural gas drilling in the U.S. has affected Schlumberger (NYSE: SLB  ) as well. Earnings estimates for both 2012 and 2013 have fallen in the last three months and investors are concerned that the company won't continue to grow.

Underlying all of this is the falling price of oil and the record low price of natural gas. With prices low, oil explorers cut back on drilling, which is bad for Schlumberger.

Let's keep this in mind, though: Earnings jumped 42% to $0.89 per share in the first quarter and drilling is still expanding around the world. Unless you think oil and natural gas will remain this low forever it might be a good time to pick up shares of this energy stock with shares trading at 15 times 2012 earnings.

SunPower
My pick, SunPower (Nasdaq: SPWR  ) , was actually the top-performing stock on our list for the first three months of 2012. But I was brought back to reality by a market that can't seem to decide if solar is coming or going.

The solar industry has been ravaged by bankruptcies and a trade war in 2012 and SunPower is stuck in the middle of it all. The company's first-quarter earnings report was a positive surprise but that was overshadowed by First Solar's struggles and the falling price of modules coming from China. When the question of survival is even on the table, investors seem to run for the exits.

I still have a long-term view of SunPower and I'm not giving up on my pick. I'll admit that it's been a failure so far in 2012 but the solar story is far from over.

Ultra Petroleum
When energy analyst Dan Dzombak picked Ultra Petroleum (NYSE: UPL  ) as his top energy stock of 2012 he made it on the prediction that natural gas prices would rise and he was buying low. The problem for Ultra Petroleum is that natural gas has continued to fall in 2012 and even fell below $2/MMBtu for a short period.

Natural gas producers are starting to cut back on drilling, shifting production to oil, but prices have yet to experience a meaningful recovery. For Ultra Petroleum that has led to one earnings miss in the last two quarters and falling estimates for this year and next. That's a recipe for a falling stock price until natural gas prices improve.

Peabody Energy
Coal has been crushed in 2012 and there doesn't appear to be any end in sight to the pain. Cheap natural gas and more stringent regulatory requirements are causing utilities across the country to shut down aging coal plants. These two factors have caused a major shift in where our electricity comes from. The amount of electricity coming from coal fell 19% in the first quarter.

Ironically, Peabody Energy (NYSE: BTU  ) has been one of the best performers in the industry so far this year. Patriot Coal recently filed for bankruptcy and Arch Coal, Alpha Natural, and James River Coal are all down more than 50%. This is because Peabody has more access to metallurgical coal than others, which it can feed to emerging markets in Asia. Peabody is also expected to be profitable this year, something most coal producers can't say.

If any company emerges from coal's downturn victorious, I would bet on Peabody, but the stock as a value play has been the thesis for years. So far, it hasn't worked out well for investors.

Foolish bottom line
Our picks have been downright disastrous this year and as you can see, this has been driven by energy prices. We still have six months to go, though, and some of these picks have a lot of potential in the second half of the year.

For another top energy stock pick check out our report called "The Only Energy Stock You'll Ever Need." It highlights another strong energy stock that has outperformed four out of five of our picks this year. The report is free when you click here.

Fool contributor Travis Hoium owns shares of SunPower in personal and managed accounts and owns shares of Kinder Morgan in a managed account. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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