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Introduction

In my previous article, we considered the top five oil companies by marketing capitalization. In this article, we continue looking at the world's largest energy companies. There are three currently classified as Oil and Gas Diversified - Conoco Philips (NYSE:COP), Occidental Petroleum (NYSE:OXY), and Marathon Oil Corp (NYSE:MRO), -- and two classified as Oil and Gas Exploration and Production -- Apache Corporation (NYSE:APA), and Anadarko Petroleum Corporation (NYSE:APC). Oil and Gas E & P companies restrict their operations to "upstream" activities, meaning finding and producing oil and gas and leaving the refining and distribution to other companies. Integrated Oil & Gas companies engage in both upstream exploration and production and downstream refining and distribution. We will look at some historical performance indicators, forward growth estimates, and macroeconomic issues in an attempt to determine which the best winning bet is right now.

Tracking Financials

Here are the five companies for our analysis:

Indicators

Conoco Philips

Occidental Petroleum

Apache

Marathon Oil

Anadarko Petroleum

Market Cap

$73.4 bil

$65.8 bil

$33.1 bil

$22.9 bil

$40.1 bil

Price/Earnings

10.8

11.0

13.4

12.5

21.4

Price/Sales

0.3

2.7

1.9

1.4

2.8

Price/Book

1.5

1.6

1.1

1.3

1.9

Forward P/E

10.3

10.9

8.6

9.8

19.3

5 Year Growth Forecast

6.7%

5.4%

13.7%

11.1%

19.3%

Dividend Yield

4.4%

2.7%

0.8%

2.1%

0.5%

ROE

18.36%

15.32%

8.71%

10.39%

9.38%

Operating Margin

9.1

40.02

30.49

37.44

22.8

Debt/Equity

0.40

0.19

0.36

0.25

0.64

Current Price

$59.83

$79.84

$83.20

$32.01

$78.27

Estimated Fair Value Range

$86-$125

$116-$166

$125-$201

$35-$60

$61-$102

Stock Valuation

Undervalued

Undervalued

Undervalued

Undervalued

Fairly Valued

Upside Potential (Premium) to Reach a Fair Stock Value

44%

45%

51%

8%

--

Data from Morningstar and Financial Visualizations on January 07, 2013

The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the five competitors, suggests the following: Currently all four stocks (except of Anadarko) are undervalued. In addition, EFS's fair stock price valuation indicates that Apache is trading at the most attractive discount.

What Does 2013 Have in Store for These Oil Giants?

As conventional sources of oil and gas dwindle, companies are forced to look to more costly alternatives like deep-water drilling and shale formations. These kinds of exploration and production activities are capital intensive and have led to more producers spinning off downstream activities into separate companies. In the past two years, both Marathon Oil and Conoco Philips have spun off substantial portions of their downstream business into independent companies.

However, volatile oil prices and dramatically lower natural gas prices in the U.S. have hurt energy companies, despite streamlining their operations. The advent of hydraulic fracturing technology in natural gas production led to an oversupply and resulting collapse in prices. Some experts are already predicting a rebound in natural gas prices, as more businesses engage in converting from oil to gas to meet their energy demands.

Conoco Philips reported third quarter earnings on October 15, 2012 and they were less than stellar. Earnings of $1.8 billion fell well short of Q3 earnings in 2011 of $2.14 billion. Lowered commodity prices explain the drop as the company saw a $3.89 per barrel drop in crude oil prices and a 27% drop in natural gas liquid prices. To round out the dismal picture, natural gas prices fell 16%,

The company has only been operating as a "pure play" upstream oil and gas explorer and producer for a few months following the spin-off into Philips 66 PSX in May of 3012. With 45% of production coming from natural gas, COP is well-positioned to benefit from rising gas prices.

A "wait and see" attitude might be appropriate for some investors. However, Conoco has some compelling indicators right now. It has the lowest P/E and P/S of any of the five companies at 10.8 and 0.3. Forward valuation also looks promising with a respectable 5 year growth estimate of 6.7% and a Forward P/E of 10.3. Top that off with a superior dividend yield of 4.4% and you have a good argument for investing. The dividend yield is solid with COP showing a 5 year average dividend yield of 3.7%.

Occidental Petroleum's Q3 2012 earnings of $1.69 per share beat analyst estimates of $1.63. However, these results showed a 23% drop from 2011. The company is still integrated with some "midstream assets like pipelines and carbon dioxide processing plants. The stock price was at $105 in March of 2012 but is actually up 4.22% so far in 2013.

Occidental's current and forward valuations are attractive, with TTM and Forward P/E's under 15 and an expected growth rate of 5.4%. These numbers along with a lower dividend yield of 2.7% make COP appear to be the better play.

However, there are good reasons to look at OXY. An Occidental board member recently bought 5,000 additional shares of the company. The analyst firm of Dahlman Rose initiated coverage of Occidental with a BUY rating and an $86 price target, as did analysts at Standpoint Research with a $90 price target.

Marathon Oil spun-off its downstream assets into Marathon Petroleum in 2011. It is one of the few oil and gas companies to show positive share price movement year over year, up 5.82% and 24.5% for the half year. The company's third quarter earnings release showed an 11% profit increase year over year. The company's reported $0.64 earnings per share missed analyst estimates of $0.65 but revenues of $4.16 billion handily beat estimates of $3.51 billion. The company also raised its production guidance for Q4.

Marathon's future is heavily dependent on shale gas development and recent production gains have led to the stock being upgraded at year end. JP Morgan Chase went from NEUTRAL to OVERWEIGHT with a target price of $35. Goldman Sachs upgraded the stock to a BUY rating with a $39 price target while downgrading shares of Exxon-Mobil on the same day, December 14th 2012.

Apache Corporation released Q3 earnings on November 1 2012 with a beat on revenue and a miss on earnings. EPS of $2.16 missed estimates of $2.27 per share but revenues of $4.18 billion bested estimates of $4.10 billion. GAAP earnings were down 84% to only $0.41 per share but that was attributed to a one-time write-off.

Despite the fact Apache's forward valuations look better than its rivals in our table with a Forward P/E of 8.6, the company has seen its share of downgrades and price target reductions in the last month. This could be due to the aggressive expansion strategy to increase its resource base. While the dividend yield is too low for income investors, the kind of long term thinking in its acquisition strategy makes APA one for growth investors to watch.

Anadarko Petroleum appears to be the odd man out from our five companies. It has the highest current P/E of 21.6; the highest P/S of 2.4; the highest P/B of 2.9; and the highest Forward P/E of 19.2. APC also has the highest debt to equity ratio of 0.64 and the lowest dividend yield of 0.5%.

However, the one number that suggests taking a second look is the 5 year growth estimate of 19.3% The number reflects the bullish views of several major analyst firms who have reiterated BUY or OVERWEIGHT ratings and raised price targets in the last 30 days. These firms include Deutsche Bank, Jeffries Group, Barclays Capital, and Citigroup.

Final Verdict

Income investors have a clear choice with Conoco, Occidental, and Marathon paying higher dividends. While Anadarko's valuation is less attractive than the others, it is still respectable for a major oil and gas explorer and producer. Right now valuations are low industry wide, with even top producer Exxon Mobil having a current P/E of 9.4 and a Forward P/E of 10.2. In short, any of these five companies could produce solid returns over the longer term.

Source: Too Many Oil Bargains: Which Is The Best Bet For Now? - Part 2