These compelling buys in oil, gas, coal, nuclear and renewables offer sizzling opportunities for investors. By Anne Kates Smith, Executive Editor and Bob Frick, Senior Editor April 21, 2011 Energy is once again on the front burner. Crises in the Middle East and North Africa are roiling global oil markets, and disaster in Japan set off a chain of events that once again calls into question the safety of nuclear power, an important source of electricity. The most immediate impact on most Americans is pain at the pump, with gasoline prices now more than $4 a gallon in parts of the U.S. But what’s painful for the pocketbook may also resent opportunities for investors, who can find attractive stocks in almost every segment of the energy market. Bet on Higher Oil Prices Stocks of companies whose fortunes rise with the price of oil are the first place to look. The U.S. Energy Information Administration expects West Texas Intermediate crude oil to average $102 per barrel this year and $105 next year, up from $79 in 2010. Rebuilding Japan and replacing lost nuclear power there will boost demand a bit. But geopolitical turmoil is probably adding about $10 to $15 to the price of a barrel of oil -- a premium that could recede if things settle down. Bulls contend, however, that oil is headed higher, conflict or no. Says longtime oil analyst Charles Maxwell, of Weedon & Co.: “We can produce only a limited amount of new oil. The world economy is picking up, and China and India are barreling along -- that’s the longer-term problem.” Maxwell likes Canadian producers because they don’t have to rely on the Middle East for oil. “Canadians have a reserve base greater than the Saudis,’’ he says. His choices: Suncor Energy (symbol SU, $47), Canada’s largest oil company, and Cenovus (CVE, $40), which has about 85% of its assets in Canada and the rest in the U.S. (all prices and related data are as of April 8). Advertisement With high oil prices spurring exploration, spending on gear and services will log double-digit annual growth over the next few years, says Evan Smith, a portfolio manager at U.S. Global Investors. He favors National Oilwell Varco (NOV, $80), a Houston-based firm that provides rig equipment and maintenance. National furnishes gear to some 90% of the world’s rigs, says research firm Morningstar, and will benefit from the recent lifting of the moratorium on deep-water drilling in the Gulf of Mexico. ConocoPhilips (COP, $81) is the second largest integrated oil company in the U.S., measured by reserves. Operating in 40 countries, the firm is in the process of divesting $10 billion worth of lackluster assets over the next two years. It plans to cut capital outlays and focus what it does spend on exploration and production, a more promising business than refining. Meanwhile, Conoco is burnishing its balance sheet by reducing debt. And in February, it boosted its quarterly payout from 55 cents a share to 66 cents, giving the stock a 3.3% yield (for more, see SLIDE SHOW: 12 Stocks to Get Dividends Every Month). Watch our video for more ways to invest against rising oil prices. GAS: POPULAR BUT PLENTI FUL A golden age of natural gas is dawning, partly by default. First, there’s renewed zeal to curb oil imports and lingering worries about offshore drilling, thanks to last year’s big oil spill. Add to that fresh concerns about nuclear energy and stiff new environmental regulations pressuring the coal industry, and natural gas, which emits 60% less carbon dioxide than coal, emerges as the likeliest bridge to still-immature alternative-energy sources. Advertisement For investors, the problem is that gas has become plentiful and cheap in the U.S. New extraction techniques are tapping previously hard-to-reach supplies in vast shale formations stretching from New York to Texas. “We have a glut in North America that’s not going away soon,” says analyst Pavel Molchanov, of Raymond James. Gas prices peaked in July 2008 at nearly $14 per million British thermal units; they are expected to average $4.10 per million Btu’s this year, and $4.58 next year. For now, the best way to stake a claim on gas’s bright future is to invest in companies that produce the stuff but know how to make money from oil, too. The heavy hitter here is Exxon-Mobil (XOM, $86). Exxon thinks global gas use will be more than 45% higher 20 years from now, driven by growth in developing countries and demand for cleaner power. To that end, Exxon became the largest gas producer in the U.S. when it purchased XTO Energy in a $41 billion deal last year. EOG Resources (EOG , $115) is primarily a natural gas company, but its portfolio includes oil as well. The flexibility allows EOG to shift its emphasis from gas to oil to natural gas liquids (valuable derivatives separated from the gas), depending on commodity pricing. EOG is also partnering with Apache (APA) and EnCana (ECA) to build a liquid natural gas export terminal in British Columbia, Canada, to tap into the lucrative Asian market. Though still years off, “that’s a development to watch,” says Cameron Horwitz, an analyst with Canaccord Genuity. Advertisement THE CASE FOR COAL The global economic recovery -- which appears solidly, if not spectacularly, on track -- bodes well for coal. The shiny black rock generates almost half of the electricity we use in the U.S., but its appeal is fading here. Some 20% of coal-fired plants will shut down over the next decade as tough new emissions standards go into effect and as more utilities switch to cheap, cleaner-burning natural gas. But developing countries, especially China and India, can’t get enough coal. Exports of U.S.-mined coal are booming, not only for the thermal coal used to make electricity, but most especially for higher-priced, metallurgical coal, which is used to make steel. Japan’s already hefty use of both types of coal will increase, as the country rebuilds and replaces lost nuclear power. Meanwhile, supplies are tightening because of flooding in Australia that disrupted coal mining there and restrained production on the part of big companies in the U.S. The industry is facing tough new emissions limits at power plants and scrutiny on safety issues after an accident in West Virginia left 29 workers dead. But nascent technology to capture and store carbon emissions could one day be a bonanza for coal producers. Advertisement Investors with a long time horizon should consider Peabody Energy (BTU, $68), the world’s largest private coal company. It fuels 10% of U.S. electricity generation and 2% worldwide. The company produces coal for steel, too, and boasts unmatched geographic diversity. Peabody is the top producer in Wyoming’s Powder River Basin, where extraction costs are a fraction of those in Appalachia, and it has a big presence in Australia, where it can tap into lucrative Pacific Rim markets. Expectations of record sales and earnings this year are no secret -- look for a pullback to buy into Peabody. Alpha Natural Resources (ANR, $57) is in the process of acquiring Massey Energy in an $8.5 billion deal expected to be completed this year. The combo will create the largest U.S. metallurgical coal producer, with diverse holdings in Appalachia and the Powder River Basin. And the Value Line Investment Survey notes that “ANR’s size, scale and reach will be a benefitat a time when the global economy is gaining some traction.” THE NUCLEAR CONUNDRUM Two conflicting themes are playing out in nuclear energy. It’s reasonable to conclude that after the accident in Japan, the approval process for nuclear energy projects will slow because of heightened safety concerns -- and that when facilities do come online they will be more expensive because safety requirements will be greater. But you might also conclude that given growing concerns about global warming, reducing carbon emissions from fossil fuels is paramount -- and that for now, nuclear energy is the best alternative. With so much uncertainty, it’s best to stick with companies that offer truly compelling technology or unparalleled expertise -- as well as being able to generate revenue from sources other than nuclear energy. Babcock & Wilcox (BWC, $32) is a government contractor that builds small nuclear reactors to power U.S. military submarines. The company is attempting to commercialize its technology for the U.S. power industry. “The issue with big reactors is that, unless you’re in New York City, you’re generating a ton of excess power,” says Gleacher & Co. analyst Will Gabrielski, who rates Babcock a “buy.” Babcock’s small, modular reactors, which could be tailored to the needs of less-populous areas, would be far more economical. Commercial power generation is years away, but the company’s shares will reflect progress along the way, Gabrielski says. Meanwhile, Babcock has its steady government work and is also a big player in refitting coal plants to control pollution. Shares of Shaw Group (SHAW, $35), an engineering and construction firm, took a beating after Japan’s accident and are still 8% below pre-quake levels. But the stock is unfairly depressed, in the view of the bulls. Shaw’s utility customers in the U.S. and China have indicated their commitment to projects in development. But analyst Andrew Wittmann, of Baird & Co., calculates that even if development of nuclear power plants were to cease (including facilities under construction), Shaw’s stock would still be worth $40, given the company’s interests in other energy industries, as well as chemicals. If the nuclear renaissance that seemed imminent before Japan’s crisis is delayed but not canceled, Shaw has nowhere to go but up. RENEWABLES’ PROMISE Secretary of Energy Steven Chu thinks the U.S. could learn a lesson from retired ice hockey great Wayne Gretzky. In a recent speech at a renewable energy conference, Chu asked, “Do we hope for the best and plan for an economy where oil is $40 a barrel? Or do we plan for something different?” His advice: Think like Gretzky, who once said, “I skate to where the puck is going to be, not where it has been.” No one expects alternative-energy sources to supplant fossil fuels anytime soon. But what’s almost certain is that renewable sources will be a growing part of the energy scene as oil prices rise and the costs of renewable-energy technologies continue to fall. For now, alternative-energy companies benefit from government subsidies and requirements that a certain percentage of power come from renewables. In many areas, solar power is already competitive with traditional energy sources, thanks to government mandates, assorted state grants and a 30% federal subsidy for renewable projects that is in effect until 2016. First Solar (FSLR) is the sun god in the U.S. solar-industry pantheon. It dominates the market for photovoltaic cells here, and it is making inroads in Europe and China. Sales, which totaled $135 million in 2006, should hit $3.8 billion this year. Analysts, on average, expect earnings of $9.44 per share this year. Given First Solar’s rapid growth -- analysts see profits rising 23% a year over the next three to five years -- the stock, at 16 times estimated 2011 profits, may be undervalued. If you want something even cheaper, and a bit more speculative, look at LDK Solar (LDK, $12). The Chinese company is a leader in the race to cut manufacturing costs. It should further distance itself from rivals by reducing costs 20% to 25% this year, says Standard & Poor’s analyst Angelo Zino. Analysts predict that earnings will jump 10% in 2011, to $2.46 per share, so the stock’s price-earnings ratio is less than 5. LDK has been dogged by debt, but Zino thinks the company’s plan to sell some operations will ease the load. His 12-month stock-price target is $19. Generating power is only half of the clean-energy equation; the other half is using what we generate intelligently. EnerNOC (ENOC, $18) helps utilities and energy grids cut demand for energy when it surges and rewards users for conserving energy. More than 7,000 factories, universities and commercial buildings use EnerNOC’s systems, which tell customers to reduce power use during peaks by, say, turning off idling machines. Utilities -- EnerNOC has contracts with more than 100 in North America -- then reward EnerNOC and its customers for cutting demand. The stock has tanked since hitting $50 in late 2007, but 2010 was the company’s first year of profitability, and demand can only increase for the types of services EnerNOC offers. Geothermal systems, in which steady temperatures below ground provide heating and cooling, pay for themselves even without government aid. Jack Robinson, manager of Winslow Green Growth Fund, favors WaterFurnace Renewable Energy (WFI.TO, $25 Canadian), a small company that is based in Fort Wayne, Ind., but trades on the Toronto Stock Exchange. The real estate sector’s woes have crimped WaterFurnace’s growth (most of its systems go into new construction), but Robinson is confident that sales will boom once building picks up. The stock yields 3.5%, “so you can enjoy the yield while you wait for the real estate market to turn,” he says.