Energy Stocks 2014: Follow Warren Buffett's Strategy to Pick the Winners

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energy stocks 2014Energy stocks 2014:The North American oil and gas boom is setting the energy sector ablaze right now. A boom in supply, coupled with a projected 56% increase in the global consumption of oil and gas by 2040, means that some of the best investments are in energy.

But it's important to know which energy stocks give the best returns with the lowest risk.

Given the excitement and security of the North American oil and gas boom, some energy stocks are overvalued right now, trading a bit higher than they should.

That's why investors tune into the "Oracle of Omaha," Warren Buffett, using his strategy as a guide to finding value in energy stocks this year.

And Buffett has his eye on the Canadian oil and gas industry...

What Buffett Sees in Canadian Energy

Over the last five years, Canadian energy stocks have underperformed against their southern rivals. The S&P Oil & Gas Exploration and Production Select Index has risen approximately 150% since 2009, while Canada's S&P Capped Energy Index is up a modest 30%.

Why such a steep differential? Infrastructure.

Due to a lack of pipelines and rail cars to ship oil and gas out of the energy-rich areas of Central and Western Canada, a supply glut has forced producers to sell their fuels at a discount. Some companies are also taking on more debt to finance production expansion and storage facilities for fuels. As a result, companies' bottom lines are taking a hit.

But last June, Buffett made a statement about the potential of the Canadian oil and gas industry with his wallet. He purchased 18 million shares of Suncor Energy Inc. (NYSE: SU). Though he never explained why he made the purchase, it's evident that Buffett sees deep value in Canadian resource companies.

Canada's infrastructure problems are likely to be resolved in the coming years, including the passage of the Keystone Pipeline, which would move 830,000 barrels out of the region each day. Once companies are able to sell their product at a higher price, debt issues are likely to be resolved.

Buffett clearly sees deep value in the energy sector - and geopolitical factors, infrastructure problems, and economic uncertainty allow investors to look for value buys around the globe.

Taking Buffett's lead, here are three undervalued energy stocks to buy in 2014 that have massive long-term potential...

Energy Stocks 2014: Three Value Plays

The best energy stocks for 2014 are value picks. They trade at low price-earnings (PE) multiples, offer a steady dividend, and are poised for growth after geopolitical tensions or infrastructure problems are resolved over the long term.

Investors who wish to follow Warrant Buffett's value plays might consider CNOOC Ltd. (NYSE ADR: CEO). Beijing, China-headquartered CNOOC has been hit hard over the last few weeks due to exposure in Russia and factors related to the Crimea crisis.

But CNOOC is a major player in the Canadian oil and gas trade - in 2012, the company paid $15.1 billion to purchase Nexen, a Canadian oil and gas producer. At the time, it was China's largest overseas energy acquisition.

The stock is off about 18% so far this year. It is trading a price/earnings (P/E) multiple of 6.39 and pays a 4.83% yield. Analyst consensus according to Yahoo! Finance places a one-year target on the stock of $186.90. However, there's likely more upside to the company as tensions in Russia settle and production issues in Canada are resolved to remove the supply glut currently hindering profitability.

Speaking of Russia, value investors are looking to the country for a terrific opportunity in energy stocks...

It's true that companies in Russia have been battered and bruised over the Russia-Crimea crisis. Russian markets continue to stagger, and large oil and gas companies have seen their share prices plummet. Though Gazprom and Rosneft have garnered the most attention from the financial media, LUKOIL (ADR) (LUKOY) deserves a look.

The ADR is trading at 0.52 book value, and the numbers look tempting. LUKOIL trades at a P/E ratio of 5.23 and pays a 5.79% dividend. Naturally, there is some greater risk in the Russian market, but that touches on another of Buffett's themes - contrarian investing.

Finally, this next recommendation is a gem among energy stocks in 2014.

Penn West Petroleum Ltd. (NYSE: PWE) is an oil and gas company based in Alberta, Canada, that's abound with upside potential.

The company is trading at a paltry 0.54 book value, all while paying a strong 6.0% yield. Yahoo! Finance has the company's 2015 consensus target set at $10.37, a projected 18% increase from today's current levels.

PWE stock sat at $8.78 on Wednesday. Its 52-week range is $7.03 to $13.16.

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