Value Investors Have Many Stocks to Buy in the Energy Sector

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Last year was a good year for oil and gas stocks, but unless a company had a refining and marketing operation, it was not a great year. Share prices rose by at least 80% for pure-play refiners, while the integrated companies stayed mired in the single-digit realm. Services companies posted share price gains in the teens, and natural gas producers had a really tough year. Value stocks in the energy sector are sometimes hard to identify because the large companies cannot grow much and the small ones are often quite risky.

So far in 2013, refiners have managed to keep the profits rolling in, but those profits are getting slimmer as the spread between West Texas Intermediate (WTI) and Brent grades of crude oil narrows. The producers feel the pinch from lower realized prices per barrel, the services firms feel the pinch as fewer wells are drilled and the refiners no longer benefit as much.

Natural gas producers have begun to see an improvement in pricing, from around $3.20 per thousand cubic feet at the beginning of the year to more than $4.00 last week. That is a boost of 25%, and some analysts think that price could double by the end of this year.

Here is our latest take on some of the major players in the oil and gas sector.

Integrated Major Oil and Gas Companies, Plus One

Exxon Mobil Corp. (NYSE: XOM) closed at $92.21 last night and has a market value of about $410 billion. The consensus target price from Thomson Reuters is around $94.30, and the 52-week range is $77.13 to $93.67. Exxon has a dividend yield of 2.7%. The implied upside to the consensus target is a scant 2.3%, and note that the target price is above the 52-week high.

Chevron Corp. (NYSE: CVX) closed at $124.93 last night and has a market value of about $242.2 billion. The consensus target price is around $129.50, and the 52-week range is $95.73 to $126.98, a new high set yesterday. Chevron has a dividend yield of 3.2%. The implied upside to the consensus target is just 3.66%, and the target price is above the 52-week high.

BP PLC (NYSE: BP) closed at $43.30 last night and has a market value of about $138.2 billion. The consensus target price is around $51.40, and the 52-week range is $36.25 to $45.45. BP’s dividend yield is about 5%. The implied upside to the consensus target is 18.7%, and note that BP’s target price also is above the 52-week high.

Continental Resources Inc. (NYSE: CLR) closed at $84.44 last night and has a market value of about $15.5 billion. The consensus price target is around $101.70, and the 52-week range is $61.02 to $93.99. Continental pays no dividend. The implied upside to the consensus target is above 20%, and the target price is well above the 52-week high.

We thought it might be instructive to toss Continental Resources into the mix because it is the largest producer in the Bakken oil shale play. As a valuation play, it offers an upside that is stronger than even BP’s, without the drag that BP still gets from any remaining liability for the April 2010 Gulf of Mexico disaster. The downside for Continental is high expectations — the company is expected to grow revenues by nearly 50% in 2013. The major upside is the narrowing gap between WTI and Brent crude varieties and added rail transportation out of the Bakken.

Forced to choose between BP and Continental, we would go with Continental, even absent a dividend. Share price growth potential is more likely than at BP, and the share price only has to rise by a little more than $2.00 to make up for the forgone dividend. Share price appreciation at BP is much more problematic.

Natural Gas Producers

Chesapeake Energy Corp. (NYSE: CHK) closed at $21.10 yesterday and has a market value of about $14.1 billion. The consensus target price is $22.45, and the 52-week range is $14.45 to $22.97. Chesapeake’s dividend yield is 1.7%. The implied upside to the consensus target is about 6.4%, and the target price is only slightly below the 52-week high.

EOG Resources Inc. (NYSE: EOG) closed last night at $130.93 and has a market value of about $35.6 billion. The consensus price target is about $155.25. The 52-week range is $82.48 to $139.00. EOG has a dividend yield of 0.6%. The implied upside to the consensus target is 18.5%, and the target price is well above the 52-week high.

These two companies rank second and third behind Exxon in natural gas production. Higher natural gas prices in 2013 represent the view of virtually every energy expert in the country. On valuation alone, EOG holds the inside track among these producers. It simply takes too much growth for Exxon to move the needle, and even though Chesapeake has a new chief executive officer with a solid background in operations, he will not join the company until next month and is likely to have only a limited impact on this quarter’s performance.

Oil Field Services

Schlumberger Ltd. (NYSE: SLB) closed last night at $75.58 and has a market value of about $100 billion. The consensus price target from Thomson Reuters is $90.50, and the 52-week range is $59.12 to $82.00. Schlumberger has a dividend yield of 1.7%. The implied upside to the consensus target is about 19.7%, and the price target is well above the 52-week high.

Halliburton Co. (NYSE: HAL) closed at $44.02 last night and has a market value of about $41 billion. The consensus target price is $51.00, and the 52-week range is $26.28 to $45.75. Halliburton’s dividend yield is 1.1%. The implied upside to the consensus target is 15.9%. Again the target price is well above the 52-week high.

Baker Hughes Inc. (NYSE: BHI) ended yesterday at $47.40 and has a market value of about $21.2 billion. The consensus target price is $50.65, and the 52-week range is $37.08 to $50.97. Baker Hughes has a dividend yield of 1.3%. The implied upside to the consensus target is about 6.9%, and the target price is above the 52-week high.

National Oilwell Varco Inc. (NYSE: NOV) closed last night at $69.17 and has a market value of about $30 billion. The consensus target price is $82.65, and the 52-week range is $59.07 to $89.95. National has a dividend yield of 0.8%. The implied upside to the consensus target is 19.5%, and the price target is below the 52-week high.

Transocean Ltd. (NYSE: RIG) closed at $52.31 last night and has a market value of about $19 billion. The consensus price target is $61.00 and the 52-week range is $39.32 to $59.50. Transocean does not pay a dividend (it will pay a special, one-time dividend of $2.24 a share in four equal quarterly installments beginning in June). The implied upside to the consensus target is 16.6%, and again the price target is above the 52-week high.

Ensco PLC (NYSE: ESV) closed last night at $62.35 and has a market value of about $14.8 billion. The consensus target price is around $68.00, and the 52-week range is $41.63 to $65.82. Ensco has a dividend yield of 3.2%. The implied upside to the consensus target is about 9%, and again the price target is above the 52-week high.

Of the services firms, Schlumberger and Transocean currently trade lower today than they did when we last surveyed these companies in February. Ensco trades essentially flat. The rest have posted share price gains that have cut implied gains significantly. National Oilwell Varco remains the choice here, partly because its price target is considerably below its 52-week high. The shares have plenty of room to run.

Refiners

Valero Energy Corp. (NYSE: VLO) closed last night at $40.53 and has a market value of about $22.1 billion. The consensus target price from Thomson Reuters is $47.90, and the 52-week range is $18.28 to $44.76. Valero has a dividend yield of 1.9%. The implied upside to the consensus target is 18.2%, and the price target is above the 52-week high.

Phillips 66 (NYSE: PSX) closed at $65.39 last night, and it has a market value of about $40.5 billion. The consensus price target is $72.15, and the 52-week range is $29.25 to $70.52. Phillips 66 has a dividend yield of 1.9%. The implied upside to the consensus target is 10.3%, and again the price target is above the 52-week high.

Marathon Petroleum Corp. (NYSE: MPC) ended yesterday at $82.45 and has a market value of about $26.8 billion. The consensus price target is $95.27, and the 52-week range is $33.65 to $92.73. Marathon’s dividend yield is about 1.7%. The implied upside to the consensus target is about 15.5%, and again the price target is above the 52-week high.

Refiners are beginning to feel the pinch as prices for WTI crude narrow the spread to Brent crude. In February that spread was $21 a barrel, and these refiners were able to source their feedstocks from the much cheaper U.S. barrels. The spread has now narrowed to around $8 a barrel, shaving away the bulk of the refiners’ profitability.

Phillips 66’s margin at its mid-continent refineries in the first quarter was $27.29 a barrel, and its worldwide margin came in at $13.94 a barrel, higher than either Valero or Marathon. Phillips 66 stands to be the last of the big refiners to lose any margin to the closing spread between WTI and Brent.

Some Observations

Production was lower at all the major integrated companies last quarter, and given the slowing demand and high inventory levels, there is no reason to expect a big spurt in production this year. Prices for crude will continue on their general downward trend, forcing these firms to make hard choices about new projects.

Prices for gasoline will have to fall because U.S. gasoline inventories are rising as new cars are more fuel-efficient and drivers simply drive less. Unless federal law is changed to permit crude oil exports beyond Canada and Mexico, increased U.S. production will find its way to U.S. refineries. Refined products exports could grow, and with them, refining revenues and profits.

If there are any profits to be had in the second quarter, they are once again likely to depend on refining. Services companies’ margins are being squeezed because of price competition and falling crude prices are limiting margins for the producers.

Natural gas producers should see an upturn in prices during the summer cooling season, and most analysts expect that to carry on right through the rest of this year. Gas prices around $8 per thousand cubic feet are certainly possible.

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