An Attractive Energy Stock

If you follow the stock market, you have probably had it up to here with all the commentary about the price of oil. Nonetheless, the increasing price of oil has been a key variable affecting the market in 2004 and it is likely to remain so for the next few years. So do you buy the large integrated oils like ExxonMobil (NYSE: XOM) or one of the drillers like Diamond Offshore Drilling (NYSE: DO)?

There's another type of company to consider, however, as China's insatiable demand for oil continues to grow: The shipping companies that move oil around the world. One intriguing company that stands out as being worthy of consideration is Tsakos EnergyNavigation (NYSE: TNP).

The stock appears to be cheap with a P/E of 8.5 and a PEG of 0.47. These numbers compare favorably with the tanker industry as a whole, which has an average P/E of 13 and an average PEG of 0.73. All good stuff, but what is even more appealing to me is the 3.5% annual dividend yield and the 0.89 beta figure. Beta is a measure of volatility and the overall market is said to have a beta of 1.0. In other words, Tsakos is less volatile than the overall market.

A few weeks ago Rex Moore ran a screen for small cap stocks and guess which company appeared on the list? A company like Tsakos can be a good way to reduce the cap size of your portfolio and gain exposure to the energy sector. If oil drops in price over the long term, which I would not make a big bet on, Tsakos would probably drop too. If this stock is going to thrive, it will be because China and India are substantially increasing their demand for oil. For example, China has gone from exporting 2 million barrels a day to importing more than 2 million barrels a day and demand is accelerating rapidly. This stimulates a greater demand for oil tankers to deliver oil, which puts upward pressure on tanker rates. Higher tanker rates mean more revenue and larger profits for a company like Tsakos.

There are a couple of risks I see in this stock. A sharp drop in the price of oil obviously would be bad for business. Also, some analysts worry that small-cap stocks are rotating out of favor. So far, Tsakos has not closely correlated to the Russell 2000, but it is worth paying attention to.

Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned any of the stocks mentioned.