Energy Stocks Are Too Cheap to Ignore - Barron's

by: SA Editor Eli Hoffmann August 10, 2008 | about stocks: APC / BP / COP / CVX / DVN / SU / XOM / XTO    
Eli Hoffmann

SA Editor
Eli Hoffmann

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

One of the sharpest corrections ever in energy stocks, which has dragged shares of most large energy companies to below 10x next year's earnings, is a seldom-seen opportunity to make 25% or more on your money over the coming year, Barron's Andy Bary says.

Energy analyst David Kistler notes major independents like Anadarko (APC), Devon Energy (DVN) and XTO Energy (XTO) are trading at little more than half their net asset values, making their risk/reward excellent. Such firms are heavily focused on North American E&P, which shields them from much of the geo-political turmoil multinational peers have suffered in Venezuela, Russia and Nigeria. APC and DVN are also prime takeover targets at current prices.

Investors worry the oil majors (ExxonMobil (XOM), Chevron (CVX), BP (BP), ConocoPhillips (COP)) are being hurt by largely undisclosed production-sharing accords with nations in which they drill. Given high oil prices, the agreements - which limit producers' returns after recouping initial investments - are quickly putting the host countries in control. Barron's notes that for Exxon, only 20% of its output is subject to such accords, and thinks its problems and those of its peers have already been more than priced into its shares.

Lehman's Paul Cheng likes Chevron, which trades for just 6.6x 2008 earnings. He sees CVX boosting output by 4% in 2009 and 2010.

Suncor Energy (SU), the most prominent oil-sands play, trades for just 8.5x 2009 earnings. Bear in mind it consistently trades at a premium due to its enormous reserves that could last 100 years vs. 20-30 for other oil majors. XTO Energy (XTO) is another company whose historic premium has vaporized.

"Given such valuations, it seems tough to go wrong now with XTO or almost any major energy stock, even if energy prices fall a little further."

Related Articles

This article has 35 comments:

  •  
    Aug 10 04:20 PM
    Comparing to the peak they reached during past May or June, these stocks' prices are bloody cheap, but...why cannt they go down further?

    what happens if oil price coming down further say to below $100?


    Reply | Link to Comment
  •  
    Aug 10 05:03 PM
    Oil stocks are done with.By now all of the investment community comprehends that the oil spike was not driven by the geometric explosion in the final demand but rather by a massive bankrupt strategy of long oil short financials .
    The unwinding of these positions is not over ande will bankrupt many yet.
    The windmill,the nuclear and hydroelectric energy play ,has been mostly exhausted as well.
    Even the grain prices had a spike as a result of conversion to ethanol(corn).
    To me one very promising source that could allieviate shortage of oil, is the Canadian oil sands.
    However ,this sector appears to have been totally ignored.Time will tell.
    Many experts claim that it is not the oil shortage that is the problem ,but rather inability of most refineries to "crack"the heavy crude,as the heavy crude is readily available.
    I could not help but notice one Canadian company that is working on the oil sand conversion to oil and conversion of the heavy crude to light crude .In addition the company is looking for oil in China and produces small amount of crude.
    That type of company (energy) could make a sense but it will not likely make a great move untill it is discovered by some hedge fund By then it is too late.
    Reply | Link to Comment
  •  
    Aug 10 05:28 PM
    Well time will tell.Personally Iam afraid of demand destruction
    Reply | Link to Comment
  •  
    Aug 10 06:14 PM
    Eli, I've researched Exxon (XOM) & have to agree with your article - Exxon's valuation is compelling to say the least:

    - going thru Exxon-Mobil’s 2007 Annual Report:

    • From ’03 to ’07 - # of shs o/s diluted went down from 6.7 bill to 5.6 bill; net inc per diluted share rose from $3.23 to $7.28

    • Exxon makes money regardless of the price of oil. For instance, they sell lots of plastics & resins, if the price of oil falls, Exxon’s cost of goods sold goes down & their profit margins in these areas go up.

    • In summary, given Exxon’s tremendous earnings & reduced share count, it seems to many that the stock price can easily exceed $100 share. Especially since Exxon is buying back about 1.4 million shares of stock every day. XOM closed at $78.33.
    Reply | Link to Comment
  •  
    Aug 10 07:35 PM
    Gabe likes the oil sands, that is like getting oil out of asphalt. It works, but has a very low "return on energy expended". Also the natural gas to expand the recovery of oil from these sands is very large. Supply is limited. The article is right, the oil stocks are undervalued and a good investment opportunity. Earnings and value are up. Crude can go up or down and they are good buys.
    Reply | Link to Comment
  •  
    Aug 10 08:28 PM
    Around here the notice has been served and that is individual households that rely 100% on petroleum to heat with, can no longer with any sense of security rely on stable oil prices. In geo-political cost there is as much to be argued and that only perpetuates the cost of the problem and often if ever does anything to resolve the problem.

    The "energy" stocks do nothing more than supply product. The social impact of a destabilized market place is the one area these companies could perform and instead they accept any term or condition to produce product.

    In the northeast by way of example the hyper pricing we've seen has caused near panic or more so breaking points a person or company can withstand to accept the given price for any of the products the "energy" companies supply.

    Government programs that help the poor pay for heating oil will fail at the price levels of $4.50 per gallon of heating oil or above. $5 diesel simply shuts down trucking firms. Four day work weeks, lay offs, or factory shut downs are cost that displace every aspect of lifestyle and livelihood.

    For the amount of profit generated is it really worth the social cost to society? I would argue respectfully there is also excessive waste of fuel and more so that most homes heated with oil are using outdated or poorly planned systems, the houses antiquated, or that waste is 20% regardless of stated efficiency. I'd argue further that the value of alternative fuels in any given area are now marked to the market and the local energy market for any given sort of fuel is an economic base not yet fully realized and in parts of the northeast for energy money to be spent on local hard goods is something never experienced on the scale as we have before us now.

    The measure of change is how effectively the local markets shift away from relying on "energy" companies to provide the fuel required for their (our) own well being, and that is fundamental to any term or condition the market place is likely to move towards.

    A fair and equitable means of exchange where fuel cost can be moderated given the local condition of heating or transportation. When oil runs out then of course the stock will be worth no more than the hole in the ground, and still at the cost ruin.
    Reply | Link to Comment
  •  
    Aug 10 08:44 PM
    Totally agree - there will be more downside and sideways consolidation but peak oil is their ticket to the profitmania Drill,drill,drill and buy, buy, buy these stocks - all that you mentioned and Petrobank too.
    Reply | Link to Comment
  •  
    Aug 10 10:10 PM
    Remember what Peter Lynch says.. you buy cyclicals when they are expensive and sell them when they are cheap (on a P/E basis)
    Reply | Link to Comment
  •  
    Aug 10 10:44 PM
    It is nonsense to say that life shuts down at $5 diesel or heating oil. Europe lives with prices double this and lives VERY well. I rent cars there that run on biodiesel and get 50+ mpg, and we could have been there YEARS ago. We in America have been living in a wasteful fantasy world of SUVs, Hummers, 6000 sq ft McMansions etc....and now we have to come down to earth. People in the Northeast should have been converting for years to alternative fuels; they are hardly victims now. Many in Europe burn wood stoves in winter, whats wrong with that? Plenty of wood in the Northeast, last time I flew over....come on America, stop whining and get with reality. Cheap oil is OVER.
    Reply | Link to Comment
  •  
    Aug 10 11:53 PM
    True, energy stocks are too cheap to ignore and prudent investors should be watching for the right time to buy but now may be too early.
    Reply | Link to Comment
  •  
    Aug 11 12:22 AM
    talking about expensive fuel, I´ve just came from visiting Cuzco
    in Peru, down there the price for premium gasoline is $6 and regular
    $4.50, with a monthly minimum wage of $200.
    Reply | Link to Comment
  •  
    Aug 11 12:41 AM
    half their net asset values,''''''''''''

    IS THAT CALCULATED WITH OIL AT $140 A BARREL?

    THEIR ASSET VALUES HAVE BEEN GOING DOWN, DOWN, DOWN...
    THEIR STOCKS ARE JUST REFLECTING THAT.
    Reply | Link to Comment
  •  
    Aug 11 05:30 AM
    RE: NE Energy cost and $5 diesel

    $1200 to fill a logging truck with diesel fuel is not viable or sustainable. They will have to find an alternative fuel in order to continue. Same is just as true to fill a 275 gallon oil tank with home heating oil. On average, a home may well consume 1200 gallons of heating oil each heating season. Or, as stated is likely using in excess of 20% more than it should by design, or consumption. Maine households for example consume 400 million gallons of home heating oil, its institutions 100 million gallons per annum.

    As a side note. The world's largest pellet mill is located in Florida. It primarily ships wood pellets of southern white pine for home heating to the EU. The home equipped with a pellet boiler in parallel or in series with an oil boiler, will require perhaps 6 tons of pellet fuel per heating season at $300/ton. Generally, a cord of wood is 155 gallons of oil, or, 1 ton of pellets are less than 1 cord of wood in terms of btu/hr.

    The demand for pellet stoves, boilers, and wood pellets has temporarily exceeded current supply. The exhaust from an outdoor wood burner can be equivalent to 4 trucks idling. Cord wood cost $220 delivered.

    mesys.net/index.php
    Reply | Link to Comment
  •  
    Aug 11 07:11 AM
    Yes energy stocks look cheap when compared to the bubble before it burst. Oil has just started down. Those who lose the most after a bubble (dot com, housing or tulips) are those that buy too early, thinking the worst is over..
    Reply | Link to Comment
  •  
    Aug 11 07:57 AM
    Totally agree with the article ... most US-based energy stocks are trading at less than half their NAV, calculated at $90 oil/$9 nat gas (to answer jimmy's point).

    Don't get distracted by the home heating issue (with due respect to folks in the NE). Over 70% of a barrel of crude goes into transportation fuel (~45% motor gas & ~25% diesel/jet fuel). Until the US significantly reduces its dependency on the car to get from home to work (years), switches the motor fleet to alternative fuels or engines (technology arriving but many years to switch), and finds an alternative way to move food and consumer goods from source to centers of population (railway resurgence?), the demand for oil is staying high.

    Nat gas is a great alternative, especially for power generation. The floor for nat gas price is generally set by coal, which has also been coming down but is probably near bottom (not my area of expertise - anyone care to comment on where coal prices are headed?) The floor for oil is, in my opinion, set by international supply vs. demand (e.g. China, India) rather than US demand. Provided the global economy doesn't get too adversely affected by US woes, overall supply/demand stays tight and oil price stays $90+ (long term, today's dollar value on foreign exchange)

    I'm sitting tight on my US oil and gas exploration and production stocks; painful to watch them tank the past few weeks, but hopeful they will rebound (at a more sensible pace, perhaps) over next 6-12 months ... and deliver 30-40% gains (my estimate, by mid next year).
    Reply | Link to Comment
  •  
    Aug 11 08:43 AM
    Cheap, yes. Cheaper, Maybe. Just like financials, it will reverse sooner or later.
    Reply | Link to Comment
  •  
    Aug 11 09:21 AM
    The Pelosi/Reid/Obama windfall profits tax deserves at least a mention. If we are going to give another $1000 gift to every voter, it is only fair that the greedy oil companies pay for it. Future oil company profits do have a real tax risk. It is not enough that XOM pays more income taxes than the lowest 50% of all individual tax returns.
    Reply | Link to Comment
  •  
    Aug 11 09:29 AM
    Tulip, housing, dot.com all Bubbles tried and true BUT none Called by a vast number before the Fact.

    "A Bubble attracts most investors, until the only perceived direction is UP." The Media has been calling for the Bubble to burst for years. When they get on board and start GUSHING, the I'll call it a bubble.
    Reply | Link to Comment
  •  
    Aug 11 09:31 AM
    Exxon sure didn't ride up with the price of oil, so will it come down if oil keeps dropping?

    finance.yahoo.com/q/bc...
    Reply | Link to Comment
  •  
    Aug 11 10:01 AM
    you're forgetting that the texas people want the northeast people to freeze in the dark. this has been going on since 1981 (r.reagan).

    one hears stories from time to time of contents of residential fuel oil tanks being stolen in garrett county MD. don't try that w/propane unless you want to set the forest on fire.
    > jack
    Reply | Link to Comment
  •  
    Aug 11 11:45 AM
    The most amazing thing about many of the energy stocks is that they did not run up as fast as oil and natural gas, but are coming down even faster than oil and natural gas. There are some amazingly cheap trailing P/E's here, and even with $90 Oil and $8 natural gas, many of these stocks look really cheap on a forward P/E basis. HTE has a 20% dividend yield!
    Reply | Link to Comment
  •  
    Aug 11 12:45 PM
    If Reserves are the name of the game there are a bunch of Tar Sands operations that are about to come on line. Take a look at ECA, PCZ and CNQ and for technical investments PBT.to and NXY are interesting plays.

    As a diversified resource play there is TCK if you like Canadian dollars.
    Reply | Link to Comment
  •  
    Aug 11 12:46 PM
    right in sanfranskio you had better do som serious thinking about the big oil co paying we will pay at the pump polsio reid and obama are dead wrong on the big oil co. paying we will i know for fact see for your self do not vote for the dems that are telling these lies vote john mccain lot dems are against the three
    Reply | Link to Comment
  •  
    Aug 11 03:23 PM
    To me the Drill,Drill, Drill, should be replaced with Drill, Develop, and Discover, if we want to be energy independent.

    DRILL anyplace known to contain oil or natural gas; my back yard, White House back yard, your back yard, or the back yard of the Kennedy compound.

    DISCOVER new areas for gas and oil and drill where there is thought to be the most. In years to come, new processes will allow drilling in what are now difficult places.

    DEVELOP new forms of energy such as wind, geothermal, and solar. Large wind mills in the ocean off the east coast (out of sight of land) are now possible, but people say not on my coast. The coast belongs to all of us; it is the coast of our country. Exxon is working on a prduct that is going to advance electric cars.

    I pay what is called a windfall tax now. it reduces my income every year and you want companies to pay shuch a tax? Do you want all companies to pay or just target the ones you like less?

    I pay taxes on dividends from stocks and each company paid tax on the same dividend so that is double taxes on the same dollar. Having lived in Europe twice, I can tell you that you want to avoid their methods of taxes and benefits. The are going bankrupt quick.

    Reply | Link to Comment
  •  
    Aug 11 06:07 PM
    Did you see the seeming lack of reaction by oil prices and commodities to the Russia-Georgia violence? What must be the reason is the ongoing unwinding of hedges of oil to finance. We are watching the oil bears take control.This being options week we will see more of it. Once it is over I believe oil stocks will reflect the risk from the Russian bear and go back up some. Next week it will be the Russian bear taking over from the oil bears.
    Reply | Link to Comment
  •  
    Aug 12 05:38 AM
    Remenber whr«en Jim Rogers said that the surrise will be how high the Crude goes and how high it stays?

    Energy is still a good play for the next few years. Visit a Jim Rogers Blog at jimrogers-investments....
    Reply | Link to Comment
  •  
    Aug 12 09:04 AM
    Rogers is now a big laughter in Asia, he was speculating that China stock market to be reaching 10,000 but now its at 2500.
    So, multiplying a factor of 25% with his numbers seems much safer.
    Reply | Link to Comment
  •  
    Aug 12 12:24 PM
    hwood007 - you have written THE energy plan that we must adopt going forward. You're spot on
    Oil will be under $90 by October, albeit temporarily, and then it would be a good time to buy back in.
    Reply | Link to Comment
  •  
    Aug 12 07:58 PM
    If the oil bubble has popped ,hence oil is no longer important , why is china and russia doing everything they can to get their hands on oil and other natural resources.We are in the early stages of the wars to secure natural resources ,including oil .By the time americans realise this ,we'll be driving around in horse and buggy .The trade to sell energy companies making billions ( remember the windfall profit taxes everybody wants ) and buys financial stocks losing billions if not trillions , strikes me as less than optimal intelligence .
    Reply | Link to Comment
  •  
    Aug 13 05:56 AM
    As we make the transition from oil to alt energy I believe that oil companies will do just fine. It will be a long process and there will be a demand for oil for the foreseeable future. Oil companies will benefit either way, especially if they follow BP precendent by partnering with a company like VRNM. Ideally, oil companies themselves have been diversifying to facilitate the transition to alt fuels...the profit margins there are less subject to geopolitical factors.
    Reply | Link to Comment
  •  
    Aug 13 09:04 AM
    Just remember a couple years ago the home builders were trading at a PE of 6, then still fell 80%. Commodity prices have been moving down, and will likely tend to overshoot - it happens both on the upside AND the downside.
    Reply | Link to Comment
  •  
    Aug 13 10:16 AM
    How is the value added when oil prices go up countered when those prices reduce demand? i.e. Auto travel in the US was 12.2 billion fewer miles in June than the same month a year earlier.

    (Maine, down 7 percent, and Florida, down 6 percent. Western states with wide-open spaces were also part of the trend -- down 7.7 percent in Montana, 6.9 percent in Washington, 6.8 percent in Wyoming, 6.7 percent in Nevada, 6.2 percent in Kansas and 6.1 percent in Alaska.)

    > 400 million fewer gallons of gasoline and 318 million fewer gallons of diesel in the first quarter of 2008 than in the same period in 2007
    Reply | Link to Comment
  •  
    Aug 13 11:22 AM
    CPST1

    And I would hope the lessened use of gasoline would continue.

    Now however, we are entering the crack to Home Heating # 2.

    My first thought is a pipedream as usage of gasoline and diesel
    will return to numbers more indicitive of seasonal use.Sure,
    less gasoline in the winter and increasing demand as vacation
    time approaches next spring.......people will get tired of "staycations"...
    indusrial demand here and offshore will not dimini