3 U.S. Energy Stocks for a Growing Retirement Portfolio

Every new survey about U.S. retirement savings reports the same bad news: Americans aren't saving enough for retirement. The latest survey indicates self-employed and entrepreneurial Americans fail to put enough away.

Fortunately, America's energy boom provides two way for savers to improve their retirement lot: by building equity through capital gains or by generating income. In this article, I'll review three energy companies for capital gains. Income-generating companies will be examined in a later article.

Growing in three major oil plays
EOG Resources (NYSE: EOG  )  President and CEO Bill Thomas recently predicted his company would become one of the biggest oil-producing companies in the lower-48. He stakes this claim on the company's growing production in the Permian, Eagle Ford, and Bakken oil plays. Stated another way, EOG produces oil from three of the best oil plays in the country. Of these three, the Bakken and Eagle Ford plays receive the lion's share of capital expenditures.

Two things make EOG a capital gains candidate. First, EOG continues to grow its production of oil. Between its three major oil plays, EOG has grown its oil production an average of 43% a year for the past three years and 39% for the past six years. Its natural-gas-liquids growth also increased, but not to the same degree. Dry-natural-gas production declined, but given the current low price of this commodity this isn't cause for concern. 

The second and perhaps more important feature of EOG centers on its growing profitability. That is, EOG generates more profit per barrel of oil than ever. In 2010, the company reported a cash margin of $20.04 per barrel. In 2012, that had increased to $40.36 per barrel. This improvement came from a variety of sources, including a growing percentage of oil production relative to natural gas, declining drilling days, and self-sourced sand for hydraulic fracturing.

Top dog in the Bakken
While EOG aims to be the biggest oil producer in the country, Continental Resources (NYSE: CLR  ) already claims the title of top oil producer in the Bakken. The company also holds assets in Colorado and Oklahoma, but the Bakken is its crown jewel. And this jewel should sparkle for years to come from both increased production and proven reserves.

Like EOG, Continental seeks to drive down its production costs. For Continental, increasing the density of horizontal wells drilled in a particular layer of oil bearing shale offers a significant avenue for savings. Combining these horizontal wells with greater number of wells per drilling pad has dropped the price per well from $9.2 million in 2012 to $8 million in 2013. Meanwhile, $7.5 million per well is the company's goal for 2014.

These efforts have paid off for Continental. According to its latest investor presentation, Continental's cash margin is $59.54 in the third quarter of 2013. Additional bits of good news include a 62% increase in earnings before taxes, depreciation, and amortization and a 17% increase in proved reserves since the end of last year. All of this was achieved with a modest decline in the total number of rigs drilling in the Bakken.

The next Bakken in Colorado?
The Eastern Mediterranean holds substantial natural gas reserves and Noble Energy (NYSE: NBL  ) is a driving force behind its discovery and production. However, a potentially bigger energy play centers on the Niobrara oil play in Colorado. Estimates vary from 2 billion to 7 billion barrels of oil in this play. The trick is getting it out, as the Niobrara possesses geological features that make hydraulic fracturing difficult.

Not deterred, Noble projects drilling 500 wells a year in this play and anticipates a 20% annual production growth rate for the next five years. Despite the tricky geology, Noble reports its net drilling costs are lower in the Niobrara than in the Bakken.

The third quarter of 2013 showed a 40% increase in production compared to the third quarter of 2012. Fortunately for Noble, there is growing pipeline capacity building into the Niobrara that should reduce future oil transportation costs.

So what does all of this mean for investors? From all sources, Noble projects a 21% annual increases in cash flow through 2017. One major driver will be increased production from the Niobrara with additional production growth from the company's natural gas and natural gas liquids plays. While carrying $4 billion in debt, most of this won't come due until 2019 or later. The company's earnings have increased significantly from the previous year; the trend looks like this will continue.

Final Foolish thoughts
All three of these energy companies offer investors a way to grow their retirement nest egg. Over the past two months, all three stocks declined from their one-year highs. However, all three companies report growing reserves, declining production costs, and increasing profitability.

Of the three, I think EOG offers the most compelling investment. The company's assets are diversified but largely domestic -- little foreign drama to worry about. Add its owned fracking sand and railroad assets and I think EOG holds the most upside potential for your retirement nest egg.

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  • Report this Comment On December 30, 2013, at 1:42 PM, ChuckXX wrote:

    Surprised that you wouldn't have included "PXD" as one of your 3 choices.

  • Report this Comment On December 30, 2013, at 5:58 PM, dylan588 wrote:

    @Chuck, Pioneer is certainly another candidate, but I haven't been following it. Will certainly give it a look, thanks!

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