The Coming Energy Boom

Natural gas and oil production have started to change the domestic energy landscape over the past half a decade. One out of every five jobs since the end of the recession has come from the energy sector, the U.S. has become a net gasoline exporter for the first time in a generation, and North Dakota now produces more oil than OPEC member Ecuador does.

I believe we are in the early innings of an energy renaissance in North America. One area of particular interest is the expansion of the natural gas infrastructure as it takes more market share from coal and as massive new projects get under way to build the facilities needed to export natural gas. The Federal Energy Regulatory Commission's decision to approve Cheniere Energy's ( LNG) proposal to build the nation's largest natural-gas export terminal in Louisiana should kick off an avalanche of similar projects.

The companies that supply the pipes, steel, know-how and other materials and products should benefit greatly over the next decade as the U.S. capitalizes on its huge bounty of new energy sources. Here are three companies I believe will benefit and should be considered as investments to take advantage of this long-term trend.

Chicago Bridge & Iron Co. ( CBI) provides conceptual design, engineering and construction services to energy and natural resource industries worldwide.

Four reasons CBI is a long-term bargain at $44 a share:
  • CBI will be one of the primary firms employed to build these huge LNG facilities.
  • Analysts expect very solid growth from the company over the next two years. Projections call for 15% to 20% revenue growth for both FY2012 and FY2013, respectively.
  • The stock is undervalued with a five-year projected Price/Earnings/Growth ratio of 0.88 and a forward Price-to-Earnings ratio just below 13. It also has a solid balance sheet with more than $600 million in net cash (approximately 15% of its market capitalization).
  • The median price target on CBI is a little north of $54 a share. Credit Suisse has an Outperform rating and a $58 price target on the company.

Timken Co. ( TKR) develops and manufactures anti-friction bearings and assemblies, alloy steels and mechanical power transmission systems. Although it's not a pure play on the energy infrastructure ramp-up, it does get 36% of revenue from custom steel products required for drill pipes and other tubular steel needs. It is building a huge new facility in Ohio to take advantage of the expanding drilling activity in the Utica Shale, which is just beginning to take off. Its industrial and mobile divisions should also benefit from increased demand from the energy sector as well.

Four reasons Timken is undervalued at just under $55 a share:
  • It has a low five-year projected PEG of 0.88 and a forward PE of just over 9, significantly under its five-year average of 18.2.
  • It has easily beaten earnings estimates three of the last four quarters, and consensus estimates for FY2012 and FY2013 have steadily increased over the past three months.
  • It has a solid balance sheet, yields 1.8% and sells for around 1x annual revenues.
  • The median price target is $64.50. Stifel Nicolaus just initiated the stock as a Buy earlier in the month. Given the company again beat estimates easily on the top and the bottom line earlier in the week, I would look for price targets to be raised over the coming few weeks.

Friedman Industries ( FRD) engages in steel processing, pipe manufacturing and processing, and steel and pipe distribution activities in the U.S.

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