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The commodity bulls only tell half the story. They say that globalization and rising affluence with increase demand for commodities. This is true, but what they don't mention is that globalization and rising affluence also increases the supply of commodities. A global community means a global network of investors now deploy capital to develop energy projects. More regions are starting to produce. Investors should fear supply instead of chasing demand.

Producers Pump Faster

Energy companies tried to cut production in response to low natural gas prices, but couldn't stick to it. United States natural gas production for 2013 will match its 2012 year record levels. Active U.S. gas rigs drastically fell 49% this year and the number of gas rigs stood at 413. This is the lowest number of active rigs since June 1999. US prices this year are estimated only one third of its 2008 price levels.

Unfortunately for energy companies, these efforts have failed. The price of fuel started to fall last October 30 and dropped by 9.2% last November 12 from a record 44% price increase last September 10. "As the gas price goes down, it's almost like they need to produce twice as much to keep their cash flow where it was," said Mr. Edward Kallio, director of Calgary based gas consulting firm Ziff Energy Group. Gas stockpiles surged to an all-time high this month to around $15 billion using current spot prices. Oklahoma based Chesapeake Energy (CHK) reported third quarter gas production rose 9.8% from second quarter to 302 billion cubic feet.

Gas companies remain positive that a rise in gas prices would yield from diminishing number of gas rigs. This optimism seems groundless in an industry that competes almost exclusively on price.

As you might imagine, lower energy prices make it harder to sell oil and gas properties at attractive prices. Chesapeake recently announced that it would delay asset sales to seek out new buyers. The move was seen as a reaction to the reported net loss of $2 billion, which especially smarted after last year's $922 million profit. The share value also dropped drastically.

Chesapeake had hoped to sell about $19 billion worth of assets to fund the shortfall created by the dive in U.S gas prices. The 29% plunge in fuel prices caused consumers to buy on the cheap, depleting Chesapeake's reserves of enough gas to provide for every U.S household for over a year.

The sale of gas fields and assets to recover losses was originally scheduled to be finalized by the end of 2013, but these sales now have been pushed to next year. Chesapeake has also delayed the sale of 2 million acres in Mississippi Lime that was to back a deal for a joint venture with Asian investors. The energy producer cited concerns about political opposition and may have to consider buying drilling rights instead. The Canadian government's rejection of the bid to purchase Progress Energy Resources by Malaysia's Petroleum Nasional has also brought concerns over Asian buyers. Alembic Global Advisors Analyst James Sullivan, however, expressed doubts about the Mississippi Lime formation. Sullivan said, "We have continued reservations about the company's liquidity."

The drop in prices since the start of the year has also forced companies like BHP Billiton (BHP) and Encana (ECA) to write down the value of their gas properties in North America. Though drilling in many oilfields is becoming unprofitable, Argus Research Analyst Phillip Weiss indicated that Chesapeake might not follow suit regarding write offs. According to Weiss, "Eventually they'll be able to put those resources back on the books when prices recover and they become economical."

Chesapeake also refuted claims that it would run out of cash by 2013 and encouraged investors by saying that it would record about $2 billion in surplus cash flow before the close of 2012. The company also intends to borrow a five-year $2 billion loan and use proceeds from the sale of the loan to finance a credit pact in May and boost the yield to investors. There has also been a change in the board under the influence of the major stockholders, Carl Icahn and Southeastern Asset Management. An inquiry into the borrowings of former chairman McClendon is also underway, though it is not clear when the board will have results.

Conclusion

Investors need to demand incredibly low valuations to be lured into oil and gas investments. The price multiples of Exxon Mobil (XOM), Chevron (CVX), Chesapeake Energy, and others must trade at significant discounts to the broader market. Exxon Mobil and Chevron appear to be the most attractively valued oil and gas large caps in North America:

Ticker

Company

Country

P/E

P/S

P/B

XOM

Exxon Mobil

USA

9.26

0.82

2.4

CVX

Chevron

USA

8.56

0.85

1.54

CHK

Chesapeake Energy

USA

1.01

0.76

COP

ConocoPhillips

USA

10.02

1.07

1.43

EPD

Enterprise Products Partners

USA

18.02

1.07

3.59

SU

Suncor Energy

Canada

10.72

1.28

1.26

TLM

Talisman Energy

Canada

1.5

1.21

APA

Apache

USA

12.34

1.78

0.98

CNQ

Canadian Natural Resources

Canada

12.86

2.01

1.23

NXY

Nexen

Canada

35.8

2.01

1.52

DVN

Devon Energy

USA

30.92

2.28

0.99

OXY

Occidental Petroleum

USA

10.37

2.53

1.51

ECA

Encana

Canada

2.58

2.82

APC

Anadarko Petroleum

USA

19.92

2.6

1.77

EOG

EOG Resources

USA

26.83

2.81

2.33

NBL

Noble Energy

USA

43.85

4.12

2.1

PXD

Pioneer Natural Resources

USA

48.91

4.22

2.3

SWN

Southwestern Energy

USA

4.71

3.89

CLR

Continental Resources

USA

31.35

6.56

4.48

RRC

Range Resources

USA

8.03

4.82

COG

Cabot Oil & Gas

USA

87.66

9.36

4.91

Investors should put Exxon Mobil and Chevron on top of their oil and gas sector list of buy candidates. Chesapeake is more expensive on a price-to-sales basis and is currently searching for liquidity, so investors should look elsewhere at least until its price-to-sales ratio drops below all its competitors.

Source: 2 Attractively Valued Oil And Gas Stocks To Consider Now