Looking for growth in oil price and seeing value in natural gas price, we recommend a current purchase of pure plays Devon Energy (DVN), EOG Resources (EOG) and Occidental Petroleum (OXY) for their low McDep Ratios and low debt. The drive for personal economic freedom and mobility in developing countries stimulates demand for oil that we expect will require a gradually higher price to satisfy. Demand for natural gas is growing faster though it has been slowed by a recession in developed countries where technology has also unlocked abundant new supply. A steep discount in natural gas price compared to oil price presents a “value” opportunity to be rewarded in 2011-2012, we believe. The current price situation is reflected in an uptrend for oil and a downtrend for natural gas compared to 40-week averages of $86.50 a barrel and $6.19 a million btu.
DVN has long kept a balance of oil and gas growth to protect against unexpected extremes as we are seeing once again. EOG is becoming oilier as it exploits its North Dakota Bakken Shale and Texas Eagle Ford Shale. OXY is primarily an oil producer and applies new technology to drilling in California and West Texas. The three stocks are priced attractively for new investment at McDep Ratios of 0.69 for DVN, 0.85 for EOG and 0.82 for OXY. Low ratios of debt to present value at 0.08, 0.06 and 0.12, respectively, signify financial strength. Cash flow forecasts and present value estimates for each of six companies take account of latest quarterly disclosures and daily commodity price settlements. Those estimates are sensitive to cash flow (Ebitda) margin estimated for the next four quarters.
Today, we raise estimated Net Present Value for Anadarko Petroleum (APC) to $60 a share from $54 on the basis of strong cash flow. Yet, an estimated $6 billion oil spill liability raises APC debt to 0.41 times present value ---a manageable level in normal times and a source of vulnerability should the financial environment deteriorate.
Originally posted on August 10, 2010.