Elliott’s Best Buys

My Best Buys list contains my favorite Portfolio picks in the current market environment. Each stock is classified by risk level–high, low or moderate. Conservative investors should focus the majority of their assets in low- and moderate-risk plays, while aggressive investors should layer in exposure to my riskier and higher-potential plays. Hedges are appropriate for investors looking to offset exposure to the energy sector. Stocks which exceed our buy target for more than two consecutive issues will either be removed from the list or the buy target will be increased. Here’s a quick rundown on the latest news and developments affecting my Best Buys list.

1. Penn Virginia Resource Partners LP (NYSE: PVR) operates two business lines: coal royalties and midstream energy infrastructure in the Marcellus Shale and the Granite Wash.

Penn Virginia Resource Partners doesn’t mine coal but leases coal-producing properties to miners in exchange for a royalty. These royalties are typically structured under long-term deals that include a guaranteed minimum and a fee based on the value and volume of coal mined from the master limited partnership’s (MLP) properties. Thermal coal prices in the US have weakened because an unseasonably warm weather has increased inventories and some utilities have switched to lower-priced, cleaner-burning natural gas.

But Penn Virginia Resource Partners’ cash flow will suffer only a modest hit from lower production volume on its properties.

Meanwhile, the firm’s midstream energy business will ramp up substantially in 2012, offsetting any weakness in the company’s coal operations.

Penn Virginia Resources Partners has completed or soon will complete a series of major projects, including an expanded gas gathering system in the Marcellus Shale, a pipeline to deliver water to producers, and an expanded gas-processing facility in Granite Wash. Capacity on all these projects is booked under long-term contracts that ensure a steady stream of fee-based revenue.

We expect these projects to enable the firm to grow its distributable cash flow in 2012. Penn Virginia Resource Partners generated enough cash flow in 2011 to cover its distribution by a 1.1-to-1 margin. Take advantage of the stock’s recent pullback and buy Penn Virginia Resource Partners up to 29.

2. I issued a Flash Alert about Weatherford International (NYSE: WFT) after the company disclosed some details about its fourth-quarter and full-year results and announced that the company would restate earlier earnings.

After scrutinizing the company’s earnings report and listening to management’s conference call, I still regard the stock’s recent selloff as an excellent buying opportunity.

Of the four major oil-field services companies, Growth Portfolio holdings Weatherford International and Schlumberger (NYSE: SLB) have the least exposure to slackening drilling activity in US shale gas fields. Both firms also boast superior leverage to the margin recovery under way in international markets. In addition, Weatherford International generates a fair chunk of its revenue from artificial lift, a business line that involves enhancing oil and gas production for mature fields–an in-demand service that offers solid profit margins.

Unfortunately, management announced that it had uncovered another accounting irregularity, forcing the firm to restate its prior results and take a noncash charge. Although this disclosure is disappointing, the accounting adjustments don’t mask a fatal flaw. Weatherford International hired a new chief accounting officer last summer and a series of external accounting advisors in various countries; perhaps the new accounting team discovered these irregularities. The firm should file restated earnings results by mid-March.

As I noted in a Flash Alert issued on Feb. 21, the 12 percent selloff that occurred on the day of this announcement was a knee-jerk overreaction to a relatively modest irregularity. The market appears to concur with this view; the stock rallied the following day, after investors had time to digest the news. Weatherford International rates a buy up to 20, while Schlumberger, which recently broke to its highest price since early August 2011, rates a buy up to 100.

3. Shares of Core Laboratories (NYSE: CLB) have traded above my buy target for about two weeks. The company provides reservoir description services that help producers design a plan to maximize output from a particular field. The company’s focus on oil-related developments should drive further upside, but the stock trades at 23 times 2012 earnings estimates. I’m dropping Core Laboratories from my Best Buys list, but the stock still rates a buy under 105 in the Growth Portfolio.