Energy stocks are often wickedly volatile, especially now with all the uncertainty about the economy. Still, long-term returns may be enormous for those with enough patience to ride out the rough patches.

A fine example of this is the stock of oil giant Chevron Corp. (NYSE: CVX). Despite short-term volatility, the stock has done beautifully, posting annual returns of 16.7% during the past three years, 12.1% during the past five years and 10.3% during the past 10 years. One of my favorite energy stocks, Range Resources Corp. (NYSE: RRC), sports annual returns of 29.4% during the past three years, 23.4% during the past five years and 38.6% in the past 10 years, even though shares of the Texas-based natural gas producer have been known to fluctuate wildly.

Because of their long run-ups, Chevron and Range Resources are trading close to multi-year highs. I think they are unlikely to deliver above-average returns for several years, perhaps longer, based on current prices. (I should note that my colleague, Nathan Slaughter, may disagree with me on Range Resources. Earlier this month he recommended this stock for his Scarcity & Real Wealth subscribers — and it looks like it was a good move. As we go to press, the stock is up about 16% already.) Regardless, plenty of other intriguing buying opportunities exist in the energy sector, though. One mid-cap stock I have my eye on particularly stands out.

The company is Murphy Oil Corp. (NYSE: MUR), an integrated oil company that, like Chevron and Range Resources, has done very nicely over the long haul. The stock has delivered yearly returns of 11.1% during the past 10 years, and 13.6% during the past 15 years. Yet less impressive are the three and five-year returns of 6.1% and 1.8%. The stock has been subjected to periodic selloffs recently, which have hit most mid-caps, including this one, very hard. As usually occurs in uncertain times, many investors have stampeded out of mid-cap stocks and other assets they consider risky and put their money into things they see as safer. But instead of seeing this as a negative, I see this as an opportunity for long-term investors.

In the process of panic selling, investors have dumped shares of perfectly good smaller companies like Murphy Oil, which has seen its stock drop more than 20% in the past three months and nearly 30% year-to-date. But instead of casting the stock aside simply because it’s a mid-cap, I recommend closely examining its fundamentals. They show Murphy Oil for what it is — a high-quality energy company with enormous potential to enrich shareholders.

 

Indeed, analysts believe the stock is capable of soaring from about $55 per share currently to between $95 and $130 a share in the next five years, a projected gain of 72% – 136%.

These estimates are feasible mainly because Murphy Oil has been doing an excellent job of executing plans to reinvent itself from a United States/United Kingdom-focused firm to one that seeks opportunities in fast-growing emerging markets. (This sort of global presence is something I usually look for in a company because, when done right, it vastly improves the chances of long-term outperformance.) A key part of those plans is divestiture of U.S./U.K. assets — like the sale of the company’s oil refinery in Superior, Wis. to Calumet Specialty Products Partners on July 29 for $475 million. On September 2, Murphy Oil’s Meraux, La. refinery was sold to a subsidiary of Valero Energy Corp (NYSE: VLO) for $625 million. In June, the company confirmed plans to sell the three refineries it owns in Great Britain and reportedly already has buyers for one of them.

Moves like these are meant to free up resources for more profitable exploration and production (E&P) projects in high-growth areas such as Malaysia, Indonesia, Iraq and the Democratic Republic of the Congo, as well as in the Gulf of Mexico and Canada. “The fast-growing Malaysian E&P unit centered at Kikeh and Sarawak fields is Murphy’s primary near-term growth engine,” say analysts at Morningstar. Because it’s shifting focus to overseas E&P, the company is expected to raise production immensely — from 185,000 barrels of oil equivalent per day (boe/d) currently to 500,000 by mid-decade.

It will also continue growing an existing network of discount gas stations, which now number nearly 1,100 and are located at Wal-Mart (NYSE: WMT) stores in 23 states. By allowing the company to draw on Wal-Mart’s huge customer base, this alliance gives Murphy Oil an advantage in establishing profitable new gas stations. The company plans to retain enough refining capacity domestically to support these retail operations.

Analysts project earnings will grow quickly in the near-term, jumping 20% between this year and next, from $5.25 to $6.30 per share. Earnings growth is then expected to slow down but remain very solid, averaging 8.5% annually for the following four years. I suspect that estimate is on the conservative side.

Risks to consider: A greater focus on E&P in developing countries may expose Murphy Oil to political turmoil that ultimately hurts profits. Also, delays or disruptions in project startups could hinder growth and profits more than they would for larger competitors like ExxonMobil (NYSE: XOM).

Action to Take –> Although you may never have heard of Murphy Oil, you should consider buying shares if you’re looking for a long-term energy holding. The company is capable of outstanding long-term growth and might even be a mega-cap energy giant of tomorrow. Or, at its current market capitalization of $10.4 billion, Murphy Oil may well be ripe for takeover by one of the meg-cap energy firms of today.