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2 Deep Value Energy Stocks to Own

Deep value energy stocks can offer both protection and reward. We sit down with a portfolio manager to drill down on the ones to own.
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) -- In this tough environment with a tough economy, investors are more eager than ever to find stocks that not only give good reward, but also offer downside protection and a nice income or dividend stream.

According to investment manager Sandy Mehta of Value Investment Principals and VIP Global Research Reports -- whose global expertise includes Asia -- there are deep value energy stocks out there that can fulfill this criteria.


spoke with Mehta about energy stocks that he thinks currently offer very good value by way of his international experience.

TheStreet: What are some of your top emerging market picks?




has an ADR that trades in the U.S. and they have 70 years of gas reserves and currently produce 17% of all the gas produced in the world. The stock is at 0.6 times book and 4 times forward earnings.

There is certain risk in investing in emerging markets, but we believe that at 4 times earnings, for such high-quality and long-duration assets, the stock overly discounts whatever risk you might have of investing in Russia.

Some of the Canadian stocks have ADRs in the U.S., too.


(ERF) - Get Enerplus Corporation Report

-- this is a Canadian energy company. They produce oil and gas. It's got a 9% dividend yield and it's trading at 1.0 times price to book; 40% discount to NAV (net asset value).

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It's got 11 years of oil and gas reserves and another 22 years of contingent reserves. So they've got high-quality assets and U.S. investors -- you're getting paid 9% dividends and you get the dividend checks every month -- and it's a qualified dividend. So you pay lower taxes here in the U.S.

The stock used to be at $55 -- today, it's at $22 -- so it's well off 50% from its highs. It's a great-looking chart and we have the view that commodity prices will rise over time. Companies like Gazprom and Enerplus -- today you're getting them at deep value multiples -- in both cases we have more than 100% upside.

TheStreet: Have you also looked at coal stocks?

Mehta: We have looked at coal stocks in China, such as

Yanzhou Coal


-- those are stocks that we have held in the past. We're not active in those stocks right now. But if the stocks were lower in price -- if they had deep-value characteristics -- we would definitely be looking at them. But I think some of the more attractive areas are gas and oil.

TheStreet: Can you talk about the key drivers of oil and gas stocks right now?

Mehta: I think that in the longer term, there is depletion; it's both supply and demand. On the demand side, you see that China is now the number one consumer of commodities in the world, surpassing the U.S. You'll continue to see demand from China and India, with their large population bases.

That is on the demand side. On the supply side, it's becoming tougher and tougher to get at these resources in terms of drilling costs, exploration costs and the existing fuels that you have -- whether in the Middle East or in other parts of the world; there's depletion. So as you take out more of these fossil fuels from the ground -- you extract them -- the reserve basis could go down.

So I think both on supply and demand, I think there's a very clear cut message that prices will rise over time. And I think any portfolio that you have, you want to make sure you have exposure to that.

TheStreet: What do you think are the implications of looming, tougher offshore oil drilling regulations following the BP (BP) - Get BP p.l.c. Report spill?

Mehta: I think what's happening with the Gulf of Mexico and BP -- if there's legislation passed to make it more difficult to drill -- I think that would provide an upward bias for oil prices. So that would cause oil prices to go up faster. And it benefits companies such as Enerplus, and Gazprom.

TheStreet: What other types of stocks are you bullish on?

Mehta: We are bullish on several sectors. We also think that we'll continue to see strong growth in the emerging economies, particularly China and India. I think U.S. companies that have international exposure will also benefit.

TheStreet: Looking at China, have you been excited about the country's recent IPOs?

Mehta: I think the valuation on that is fair; it's OK. Long term, I think the Chinese banks are good investment opportunities.

The way we like to play IPOs -- see when you're buying an IPO and

Goldman Sachs

is the underwriter, they have more information than you do and they're determining when they want to sell and what price they want to sell to you -- and some of them may work, but a lot of IPOs don't work. And if you go two years down the road, I think over the past several years 80% of the IPOs were below their IPO price.

So what we like to do is when the IPOs bomb, and when we see the stock is underwater -- they lose the money and everybody throws in the towel -- that's when we get in, because there we're able to find stocks where you look at a company and say 'wait a second, the cash they raised at the IPO is greater than the market cap -- and we know the cash is there because they raised it.'

And those stocks get bombed out -- they're good businesses because that's how they were able to go public in the first place -- but you get them at deep value or throwaway prices. And to us, that is a better opportunity. Look at an IPO two years after it's gone public, and you'll find some incredible opportunities in great businesses.

-- Reported by Andrea Tse in New York

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