A trio of energy favorites

by Steve Christ, editor Wealth Advisory

The American oil and gas industry is one of the bright spots in an otherwise sour economy.

Indeed, we have been adding energy names to the portfolio during the most recent market downturn. Three of our favorites are Rosetta Resources (ROSE), Carbo Ceramics (CRR) and Apache Corp. (APA).

In their 2Q results, Rosetta Resources announced strong financial and operating results that included more than doubling total proved reserves from year-end 2010 and setting two all-time production records.

With a $2.25b market cap, ROSE has 300,000 net acres in the Bakken and 64,000 net acres in the Eagle Ford.

In our opinion, since the company's production is on pace to outstrip earlier estimates, that puts ROSE in the two of the best North American energy plays.

In fact, thanks in part to its Eagle Ford developments, ROSE's earnings are expected to reach $1.80 a share this year and $3.30 next while cash flow is pegged just under $6 a share this year and near $9 in 2012.

We think that makes ROSE another attractive takeover target since the stock's net asset value is easily over $65 a share due to the untapped potential in its the Alberta basin project.

We see a potential of 46% to the upside if ROSE hits the average analysts' target of $63.00. Our own target price meanwhile is $70.00 per share.

Carbo Ceramics has been a long time favorite of ours. And when the recent downturn hit, we jumped on shares as the stock quickly became oversold.

Carbo manufactures and supplies ceramic proppants primarily used in hydraulic fracking of natural gas an oil wells in the U.S. and internationally.

In short, due to their high efficiency in helping to unlock the potential in shale formations, Carbo's proprietary products are being used in nearly every major unconventional drilling project across the globe.

Demand for their proppant remains robust across the major resource plays in North America, including the Haynesville, Eagle Ford, Colony Wash, Permian and the Bakken.

The company's revenue for the second quarter increased 34% to 149.7 million compared to second quarter of 2010 while operating profit increased 61% .

What's more, the company has no debt, $53 million in cash and a PEG ratio of 0.90. CRR also pays a 0.96 annual dividend that recently was increased by 20%. It was the 11th consecutive year the company was able to raise its dividend.

In terms of horizontal fracturing, we think this is the best pure play on the market. We currently recommend Carbo Ceramics as a buy on dips below $140.

Apache Corp. engages in the exploration, development, and production of natural gas, crude oil, and natural gas liquids.

This $38 billion company has exploration and production interests from the Gulf of Mexico and Permian basinto Western Australia andthe North Sea.

It recently reported production of 749,000 barrels of oil equivalent (boe) per day and earnings of $1.2 billion, or $3.17 per diluted share, for the three-month period ending June 30, 2011.

This compares with production of 647,000 boe per day and net income of $860 million, or $2.53 per diluted share, for the same period a year ago.

The combination of higher oil prices and record production levels resulted in record quarterly revenues for second quarter 2011. Oil and gas revenues were $4.4 billion, a 47 percent increase from revenues of $3.0 billion for the same period last year.

With numerous acquisitions over the last 18 months, we think Apache is perfectly positioned for future growth with oil in its current range.

Today, the company is trading significantly below analyst estimates. Apache has a median price target of $142.75 by 22 brokers and a high target of $170.

At roughly $99 a share that leaves 43% upside from here. We continue to rate APA as a buy below $105.

Learn more about this financial newsletter at Steve Christ's Wealth Advisory.