In my previous articles (Too Many Oil Bargains: Which Is The Best Bet For Now? - Parts 1, 2, 3, 4), we analyzed the top oil companies by marketing capitalization, oil and gas diversified companies, oil exploration and production companies, and oil and gas companies involved in unconventional oil sources from oil sands. In this article, we will look at five international oil and gas exploration and production companies: Enerplus Corp. (ERF), CNOOC Ltd. (CEO), Surgutneftgas ADR (SGTZY.PK), Anadarko Petroleum Corp. (APC) and EOG Resources (EOG).
Oil and Gas E&P companies operate in the "upstream" sector of the industry. This means they have no "downstream" operations integrating exploration and production with pipelines, refineries or distribution operations. We will look at some valuation measures, historical performance indicators, forward growth estimates, and macroeconomic issues in an attempt to determine which company could be the best bargain for 2013.
Here are the numbers for the five companies for our analysis:
5 Year Growth Forecast
Data from Morningstar on Feb 7, 2013
What Does 2013 Have in Store for Oil and Gas Exploration Companies?
Oil prices currently are around $90 per barrel and plenty of supply suggests a lukewarm outlook for oil prices in 2013. The US Energy Information Agency ((EIA)) calls for a daily increase of 0.9 million barrels per day in 2013, the same growth rate as in 2012. The increased oil production from the US is likely to continue the status quo in 2013 where oil supply will be more than adequate to meet demand. Producers hit hard by declining natural gas prices can expect some relief in 2013. The EIA sees an average natural gas price in the US of $3.68 per thousand cubic feet, up from the dismal 2012 price of $2.78.
Enerplus Corporation moved from an energy income trust to a corporate oil and gas exploration and production company in early 2011. The intent was to supplement the company's solid dividend income to its shareholders with growth potential. The company's Q3 2011 earnings release was bleak but one has only to look at the price of natural gas for an explanation. Although Enerplus has assets in oil and natural gas liquids, its largest revenue source is natural gas. For the third quarter the average selling price was $2.20 per million cubic feet compared to $3.73 for the third quarter of 2011.
Enerplus has an outstanding dividend yield with a consistent payment of $0.09 per share every month for the last six months. The company had been paying a consistent $0.18 per share but cut the dividend by 50% in light of worsening market conditions. With a P/B of 0.8 Enerplus is trading below its book value. The book value per share for the most recent quarter was $16.61.
CNOOC Limited is China's largest offshore oil and gas explorer and producer. The company has virtually exclusive rights to Chinese offshore oil and gas reserves. It also has assets in Chinese natural gas and liquefied natural gas onshore operations. CNOOC is in the process of acquiring Canadian oil and gas exploration and production company Nexen, Inc. Nexen has assets in conventional oil, oil sands, and unconventional gas with exploration activities underway in the North Sea, the Gulf of Mexico, and off the coast of Nigeria. The deal is awaiting approval from the US government.
CNOOC's dividend yield of 2.5% is well below the industry average of 5.6%, but a forward P/E of only 8.7 along with a growth forecast of 42.1% makes CNOOC an attractive growth stock.
Surgutneftgas ADR is a Russian based oil and gas explorer and producer. The company also produces petrochemicals and is involved in gas processing and power generation. Surgutneftgas shows some impressive numbers in our table. It has the lowest trailing P/E at 4.6 and the second lowest Forward P/E at 8.0. Like Enerplus, SGTZY is trading below its book value of $14.69. The company has the second highest ROE at 17.7% and the second highest operating margin at 27.4%, second only to CNOOC.
There is potential here but investors should be aware this is a stock that will not be easy to research. There is only one Wall Street analyst covering the stock.
Anadarko Petroleum Corporation's Q3 earnings release fell short of analyst estimates. Revenues of $3.33 billion missed the consensus estimate of $3.4 billion. EPS missed by a wide margin, with a reported $0.24 per share versus estimates of $0.76 per share.
Anadarko has attractive assets in US deepwater offshore oil reserves off the Gulf of Mexico as well as operations in the Rocky Mountains and the Appalachian basin. However, it is the company's international potential that appears to have investors excited. Three major natural gas fields off the coast of Mozambique could make Mozambique one of the largest producers of liquefied natural gas in the world, behind Qatar and Australia.
Another reason to like Anadarko is its potential as a takeover target. An article appearing in Bloomberg in October of 2012 speculated Exxon-Mobil could be interested in acquiring either Anadarko or EOG Resources. An analyst at Macquarie expressed the opinion Anadarko's large scale of potential reserves could command a buyout offer of $102 per share at a minimum. That represents an approximately 25% premium over the current share price.
EOG Resources is one of the few oil and gas exploration and production companies whose stock price showed respectable appreciation year over year. The stock increased 17.04%. The reason could be its dominant position in the Eagle Ford Shale in south Texas. The Bakken shale has been in the limelight for some time but analysts expect Eagle Ford to be next. Apparently Marathon Oil is ready to shift resources from the Bakken to Eagle Ford. EOG holds leases on 644,400 net acres in the Eagle Ford. The company is responding to lower natural gas prices by shifting its principal focus to shale oil, where it has existing assets in the Bakken and Permian Basin as well as in Eagle Ford. EOG's 5 year growth forecast of 43.9% is the highest of any of the stocks in our analysis.
There is something for everyone in this table. Income investors with moderate risk tolerance should find it hard to ignore the consistent dividend performance of Enerplus. Those less risk tolerant should put this stock on their watch list. Anadarko and EOG have solid growth potential. Surgutneftgas merits attention as well, but only for those willing to invest the time and effort needed to follow an ADR with so little coverage. For those who believe the Chinese economy will continue to grow, it is hard to ignore CNOOC.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.