The Oracle of Omaha, Warren Buffett, doesn't own many energy companies, but he does own three. Buffett's portfolio is designed to make money over the long-term. He may underperform the market for a short period of time, but with patience over decades, he has outperformed the S&P 500. Since many investors are interested in energy stocks, I thought that it would be beneficial to analyze the few that Buffett owns.
In terms of proved reserves and production of liquids and natural gas, ConocoPhillips is the world's largest independent exploration and production company. As of September 30, 2012, COP had assets of $115 billion, with operations and activities in 30 countries. The company is focused on making significant investments in acquiring acreage for the exploration of oil and natural gas.
COP sports an above average dividend yield of 4.5%. The company raised its dividend payment every year since 2002. That's the kind of consistency that dividend investors can rely on. With a trailing twelve month operating cash flow of $15.86 billion, the company has no problem with rewarding shareholders with $3.2 billion in dividends.
ConocoPhillips is undervalued with a forward PE ratio of 10.19 and a price to book ratio of 1.51. Another metric indicating an undervaluation with COP is its low price to sales ratio of 0.31. It is not too common to find high quality companies with price to sales ratios under 0.5. By comparison, Chevron (CVX) has a price to sales ratio of 0.99, while Exxon Mobil (XOM) has a price to sales ratio of 0.96.
The company is expected to grow earnings annually at 5.25% for the next five years. That doesn't sound all that spectacular, but when accounting for the 4.5% dividend, investors should achieve a total return of about 9.75% annually.
ConocoPhillips reports earnings on January 30, 2013.
Phillips 66 (PSX)
If it wasn't for Phillips 66 spinning off from ConocoPhillips last year, then Buffett would only own two energy companies. Phillips 66 operates three primary segments: Refining and Marketing, Midstream, and Chemicals. The Refining and Marketing segment includes 15 refineries, 10,000 branded market outlets, and 15,000 miles of pipeline systems. The Midstream segment, through the company's 50% interest in DCP Midstream (DPM) has 7.2 billion cubic feet per day of gross natural gas processing capacity. The Chemicals segment has more than 30 billion pounds of net annual chemicals processing capacity. The Chemicals segment is conducted through a 50% equity interest in Chevron Phillips Chemical Company LLC.
Phillips 66 is attractively undervalued with a forward PE ratio of 8.27, a PEG of 0.93, and a price to book ratio 1.59. The company's price to sales ratio of 0.19 is even lower than Conoco's.
Phillips 66 pays a dividend of 1.9%. The company's total annual dividend payout of $626 million is just a fraction of its operating cash flow of $5.73 billion. Investors will most likely see regular dividend increases year over year.
Be aware that the company is expected to have earnings come in 16% lower next year over the current year. However, the five-year annual earnings growth is expected to average 7.15%. Investors should expect a total return of about 9% per year when accounting for dividends and stock appreciation.
Phillips 66 reports earnings on January 30, 2013.
National Oilwell Varco (NOV)
National Oilwell Varco is a global provider of solutions for the oil and gas drilling industry. Its services include: engineering and project management, drilling, downhole, industrial, lifting and handling, production, supply chain, tubular and corrosion control, and well service and completion.
The company employs a strategy of growth via acquisition. In 2012, NOV completed an acquisition for Wilson, a distributor of pipes, valves, fittings, mill, tool and safety products. NOV also completed the acquisition for CE Franklin. CE Franklin is a distributor of pipes, valves, flanges, fittings, production equipment and other supplies for oil and gas producers.
Just like many of Buffett's stocks, NOV is attractively undervalued with a forward PE ratio of 10.87, a PEG of 0.76, and a price to book ratio of 1.53.
The company pays a small dividend of 0.70%. Its annual dividend payment costs the company about $222 million. NOV had a trailing twelve month operating cash flow of $442 million.
Despite the low dividend yield, NOV offers investors above average earnings growth for the future. The company is expected to grow earnings annually at 15.9% for the next five years. This growth combined with the dividend should provide investors with an approximate total return of over 16% annually.
National Oilwell Varco reports earnings on February 1, 2013.