2 Lesser-Known Energy Stocks Ahead of Earnings

NEW YORK (TheStreet) -- If you were a stock salesperson and you wanted to sell the masses a great energy company, which one would you choose to solicit?

You might choose Exxon Mobil ( XOM) especially now that it's hit a 52-week high and pays a decent dividend. But the medium-term upside potential might be rather limited?

After the market closes on Wednesday, Aug. 8, two smaller, less famous energy companies will report their quarterly earnings, and one has a better dividend yield than the giant XOM.

Let me start with Continental Resources ( CLR), the Oklahoma energy company that explores and produces oil and gas in its own backyard and in other regions throughout the U.S.

CLR sells its oil and natural gas production to end users, as well as to midstream marketing companies or oil refining companies at the lease. You might want to carefully scour their interesting Web site and learn why they call themselves, "America's Oil Champion"-- and you thought Exxon held that title!

As of Dec. 31, 2011, Continental estimated their proved reserves were 508.4 million barrels of crude oil equivalent, with estimated proved developed reserves of 205.2 million barrels of crude oil equivalent.

The company had interests in 3,255 wells and served as the operator of 2,082 of these wells. Continental Resources was founded in 1967 and is headquartered in Enid, Okla. They've been around 45 years and they know what they're doing.

At least Harold Hamm believes that, with more money invested in the company than one could imagine. The 66-year old executive chairman and CEO owns a whopping (are you sitting down?) 123,259,048 shares of his own company. Talk about insider ownership!

At around $69-a-share, that means Hamm owns over $8.5 billion, that's "billion," with a "b," of CLR. On May 16 he purchased over $7 million more and paid between $71.51 and $72.21 per share.

Another owner of great conviction is one of my favorite privately owned institutions, FMR (a.k.a. Fidelity Investments). But compared to Hamm, their $702 million dollar stake (8,183,951 shares) pales into some insignificance.

In fact, the percentage of CLR shares held by all insiders and 5% owners is a staggering 76%. For a company with a $12.37 billion market cap where the CEO owns over $8.5 billion (69%), it might be "America's Champion" when it comes to insider ownership.

The company does have another strange characteristic. By the end of the first quarter 2012 it had less than $43 million in total cash, yet its total debt was $1.89 billion. It also had a minus $1.52 billion in levered free cash flow, probably owing to that nasty-high debt level.

Continental Resources' trailing 12-month operating margin was a picture-perfect 55% and their profit margin a lovely 33%. In the first quarter their quarterly revenue growth year-over-year was almost 70%, and their return on equity stood at 31%. Their situation has me spellbound and curious.

At $69-per-share the stock is selling at six times sales and five times book value, yet their five-year expected PEG ratio is below 1 (0.79), which hints of some share undervaluation.

It wouldn't surprise me if they surprise to the upside on their earnings and even raise guidance. With West Texas crude oil still above $93-a-barrel things may start to look even brighter for CLR. Keep an ear open to their earnings report and conference call -- "ready, get set, not yet?" Study the chart of CLR below.

CLR Debt to Equity Ratio Chart CLR Debt to Equity Ratio data by YCharts

Atmos

The second energy company that will report after the market closes Wednesday is Atmos Energy ( ATO) the Dallas, Texas-based company that engages in the distribution, transmission and storage of natural gas in the U.S.

Atmos operates in three segments: natural gas distribution, regulated transmission and storage, and nonregulated. ATO pays a higher dividend yield than their Houston, Texas competitor Exxon Mobil.

Last Wednesday ATO announced that it completed the sale of its natural gas distribution assets located in Missouri, Ill. and Iowa to Liberty Energy (Midstates), an affiliate of Algonquin Power & Utilities.

The transaction included the transfer of approximately 84,000 residential and commercial meters. Net cash proceeds for rate base and related working capital were approximately $129 million.

The announcement stated, "These proceeds will be redeployed to fund growth opportunities in the remaining jurisdictions the company serves. Atmos Energy expects to record a net of tax gain on the sale of approximately $6 million, or $0.06 per diluted share, subject to final purchase price adjustments. For the ten months ended July 31, 2012, these operations provided approximately $7 million of net income, or $0.07 per diluted share."

Institutions including The Vanguard Group own 56% of the outstanding shares of the company, and insiders are much less committed than those at CLR. Atmos' CEO 66-year-old Robert Best does own almost 382,000 shares, which at $36-per-share means he has $13,748,000 of his money where his job is.

Looking at 70% payout ratio, I personally feel the dividend yield might be in jeopardy unless the company ramps up quarterly earnings, which fell 17.5% (year-over-year) in the first quarter. This is another one of these high debt levels ($2.38 billion) low total cash ($47 million) conundrums.

Their trailing 12-months revenue as of March 31 was almost $4 billion, $44.10 of revenue per share, which represented a 22% drop year-over-year. Frankly, their other key financial statistics are unremarkable, and I'd stay away from ATO until after they announce their earnings and give guidance.

ATO is selling close to their 52-week high of $37.33 with a current P/E ratio of 18.5 and a forward P/E ratio of almost 15. If they disappoint after the market closes Wednesday, new investors may be able to join Best in owning shares closer to the 200-day moving average price of slightly above $33 a share.

The chart below shows the price of ATO shares vs. its debt-to-equity ratio. This is another company to keep an eye on and..."ready, get set, not yet!"

ATO Debt to Equity Ratio Chart ATO Debt to Equity Ratio data by YCharts

At the time of publication the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage. Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust -- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

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