BY Dennis Hobein:

Contributor, Stock Traders Daily

Real Time Trading Reports:  Included are detailed trading reports designed to help investors realize opportunities in these companies.  The reports are linked to the stock symbols in the article below.

 Performance - Click Here

(La Jolla, CA)  The price of crude oil cracked the $80 per barrel mark yesterday -- and is heading higher again this morning -- which in turn, is bolstering shares of some of the largest oil and gas companies making it one of the top performing sectors. On Monday, the Energy Select Sector Spider Fund (NYSE: XLE) finished higher by an impressive 3.2% versus a 1.5% gain for the Diamonds Trust (NYSE: DIA). Interestingly, though, even though crude oil is up a whopping 85% year-over-year, the performance of XLE has been much tamer, up roughly 17% over the same time frame.

Therefore, the question is, are oil and gas stocks undervalued and poised for a rally, or has the price of oil gotten ahead of itself? Obviously, this is not a simple question to answer, as there are several factors outside of supply and demand that affect oil prices. However, from a broad perspective, it is logical that energy prices would climb as world economies recover from the severe downturn of the past two years, and as optimism increases that U.S. GDP growth will pick up steam in 2010, and emerging countries such as China and India will continue its “urbanization” process.

Below, we take a look at the recent earnings performance and outlook for a few of the world’s largest oil and gas companies in order to form the opinion that these stocks look like long candidates as we head into 2010. Also, as a reminder, for traders interested in entering a position on any of the stocks mentioned here, we highly recommend reviewing our free trading reports first to develop key risk control measures. This can be done by clicking on the ticker symbols.

Profits Hammered In 2009, But Big Rebound Expected

Last year was a brutal one for oil and gas companies as profits tanked. For example, Exxon Mobile’s (NYSE: XOM) earnings per share nose-dived 62% in 3Q09 with revenue steadily dropping in the mid-40% range throughout 2009. The results weren’t much better for natural gas behemoth Apache (NYSE: APA) as its profits plummeted 55% last quarter. But, if we go back a bit further to fiscal year 2008, we see that these companies were posting substantial top and bottom line growth rates. In fact, at its peak, APA’s EPS soared 126% in 2Q08. Consequently, the stock was up almost 40% midway through that year before the beginning signals of the recession became apparent. What is encouraging for investors of oil and gas stocks is that this rate of growth is expected to resume in 2010. The Street is currently projecting XOM’s profits to rise 48%, APA’s 74%, and Chevron’s (NYSE: CVX) 53%. It is also worth noting that BofA Merrill calls CVX its top pick for 2010 within the major integrated oil group. In conclusion, if we are to believe the Street’s estimates, while also taking into account the relative underperformance of oil stocks, 2010 looks like a winning year for these names..