First quarter profits for U.S. integrated oil companies are not in yet, but are expected to surge on higher crude prices. Crude now trades at more than $100 per barrel. The industry also reports a rebound in refining and marketing profits.
West Texas Intermediate (WTI) crude oil spot prices averaged $89 per barrel in February and $103 per barrel in March. The WTI price has continued to rise in recent days, reaching $112 on April 8. Crude oil prices are at their highest levels since 2008 when Exxon Mobil (XOM
) reported the highest quarterly and annual profits ever for a U.S. company, with fourth quarter profits of $11.67 billion per share and $40.6 billion for the year.The U.S. Energy Information Administration expects oil markets to tighten over the next two years, given expected robust growth in world oil demand and slow growth in supply. EIA projects WTI prices to average $106 in 2011 and $114 per barrel in 2012.
The forecast for total world oil consumption grows by an annual average 1.5 million bbl/d in 2011 and 2012. Supply from non-OPEC countries grows an average of about 0.4 million bbl/d annually through 2012. Consequently, EIA expects that in order to meet projected demand growth, the market will rely on both a drawdown of inventories and significant increases in the production of crude oil and non-crude liquids in OPEC member countries at a time when the disruption of crude oil exports from Libya and continuing unrest in other Middle East/North African countries already highlight significant supply risks.
Here are eight integrated oil companies:
Chevron Corporation (CVX
) manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to the United States and international subsidiaries that engage in petroleum operations, chemical operations, mining operations, power generation and energy services. Upstream operations consist of exploring for, developing and producing crude oil and natural gas; transporting crude oil by international oil export pipelines; transporting, storage and marketing of natural gas; and a gas-to-liquids project. Downstream operations consist of refining of crude oil into petroleum products marketing of crude oil and refined products. In September 2010, the company completed acquisition of operating interests in three deep water exploration blocks in the South China Sea’s Pearl River Mouth Basin. In February 2011, Chevron completed the acquisition of Atlas Energy, Inc.
) is an international, integrated energy company. The Company operates in six segments: Exploration and Production (E&P), which explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG) and natural gas liquids on a worldwide basis; Midstream, which gathers, processes and markets natural gas produced by it and others, and fractionates and markets natural gas liquids, in the United States and Trinidad; Refining and Marketing (R&M), which purchases, refines, markets and transports crude oil and petroleum products, in the United States, Europe and Asia; Lukoil (LUKOF.PK) Investment, which consists of its investment in the ordinary shares of OAO Lukoil; Chemicals, which manufactures and markets petrochemicals and plastics worldwide; and Emerging Businesses, which represents investment in new technologies or businesses outside its operations.
Exxon Mobil Corporation (XOM
) is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. It also has interests in electric power generation facilities. It has many divisions and hundreds of affiliates with names that include ExxonMobil, Exxon, Esso and Mobil. Divisions and affiliated companies of ExxonMobil operate or market products in the United States and other countries of the world. Its principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. On June 25, 2010, it acquired XTO Energy Inc. by merging a wholly-owned subsidiary of ExxonMobil with and into XTO. In October 2010, Global Partners LP (GLP
) acquired retail gasoline stations from Exxon Mobil.
Hess Corporation (HES
) is a global integrated energy company that operates in two segments: Exploration and Production (E&P), and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place in Algeria, Australia, Azerbaijan, Brazil, Brunei, the People’s Republic of China, Colombia, Denmark, Egypt, Equatorial Guinea, France, Ghana, Indonesia, Libya, Malaysia, Norway, Peru, Russia, Thailand, the United Kingdom and the United States. The M&R segment manufactures refined petroleum products and purchases, markets and trades refined petroleum products, natural gas and electricity. The company owns 50% of a refinery joint venture in the United States Virgin Islands. An additional refining facility, terminals and retail gasoline stations, which include convenience stores, are located on the East Coast of the United States.
Marathon Oil Corporation (MRO
) is an integrated international energy company engaged in exploration and production; oil sands mining; integrated gas, and refining, marketing and transportation. Marathon operations consist of four operating segments: E&P, which explores for, produces, and markets liquid hydrocarbons and natural gas; Oil Sands Mining (OSM), which mines, extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the bitumen to produce and market synthetic crude oil; Integrated Gas (IG), which markets and transports products manufactured from natural gas, such as liquefied natural gas and methanol, and Refining, Marketing and Transportation (RM&T), which refines, transports and markets crude oil and petroleum products, primarily in the Midwest, Gulf Coast and southeastern regions of the United States. As of December 31, 2010, it acquired 177,000 net acres within the Niobrara play in the DJ Basin.
Petroleum Development Corporation (PETD), doing business as PDC Energy, is an independent energy company engaged in the exploration for and the acquisition, development, production and marketing of natural gas and oil. The company operates in two segments: Natural gas and oil sales, and natural gas marketing. The natural gas and oil sales segment reflects revenues and expenses from the production and sale of natural gas and oil. The natural gas marketing segment is comprised of the company’s wholly-owned subsidiary, Riley Natural Gas (RNG), through which it purchases, aggregates and resells natural gas produced by it. The company focuses its exploration, development and production efforts in two geographic areas: the Rocky Mountain Region and the Appalachian Basin.
PostRock Energy Corporation (PSTR) is an integrated independent energy company engaged in the acquisition, exploration, development, production and transportation of oil and natural gas. PostRock divides its operations into two reportable business segments: Oil and natural gas production, and natural gas pipelines, including transporting, gathering, treating and processing natural gas. The company’s oil and gas production operations are focused on the development of coal bed methane (CBM) in a 15-county region in southeastern Kansas and northeastern Oklahoma known as the Cherokee Basin. PostRock owns and operates a natural gas gathering pipeline network of approximately 2,173 miles that serves its acreage position in the Cherokee Basin.
Suncor Energy Inc. (SU) is an integrated energy company. It explores for, acquires, develops, produces and markets crude oil and natural gas in Canada and internationally, and it transports and refines crude oil and market petroleum and petrochemical products primarily in Canada. It is focused on developing petroleum resource basins, which includes Canada's Athabasca oil sands. The company also markets third-party petroleum products. It also carries on energy trading activities focused principally on marketing and trading of crude oil, natural gas, refined products and byproducts, and the use of financial derivatives. Suncor operates in business units, which include Oil Sands, Natural Gas, International and Offshore, and Refining and Marketing. During the year ended December 31, 2010, it sold off all of its United States Rockies upstream assets, sold off Blueberry and Jedney, Rosevear and Pine Creek, sold Trinidad and Tobago assets, and sold off its Wildcat Hills.
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For both 2011 and 2012, analyst estimates of earnings vary very widely. Chevron has about 20 analysts forecasting earnings for the current year and for next year. Current year estimates range from $7.21 to $15.22; next year estimates range from $10.50 to $15.90. ConocoPhillips also has 20 analysts making estimates. For 2011, the estimates range from $6.56 to $9.21; 2012 estimates range from $7.14 to $11.20. ExxonMobil has estimates ranging from $6.67 to $10.21 for 2011 and $5.26 to $12.38 in 2012.
Hess has about 17 analysts following it. Its 2011 estimates range from $5.39 to $10.84; 2012 estimates range from $4.13 to $13.50. In 2011, analysts forecast EPS for Marathon to range from $4.51 to $7.33; 2012 estimates are in the range of $4.79 to $6.12. Petroleum Development has 2011 estimates ranging from $0.06 to $1.01 and 2012 estimates ranging from $0.50 to $1.30.
PostRock is a microcap, with one analyst forecasting EPS for both 2011 and 2012. Finally, Suncor has nine analysts with forecasts: $2.21 to $3.25 in 2011; $2.21 to $4.30 in 2012.
These estimates reflect a great deal of uncertainty in the oil markets going forward. Three of the companies -- HES, PETD and SU -- report negative free cash flows for the trailing 12 months. We consider this factor to be a big negative. Most of these companies are paying dividends; payouts are modest.
Balance sheet ratios show another side of these companies.
Because they have negative free cash flow, HES, PETD and SU do not have a meaningful cash flow return on investment. PostRock has more debt than equity. This, coupled with a negative free cash flow makes the company, in our opinion, a very high risk. XOM has the highest CFROI of the group and a low debt to capital ratio. Long term debt to free cash flow is a very small 0.57%. COP carries a bit more debt than what we establish as our limit on a long term debt to free cash flow basis, but it is not excessive.
Our final step is to look at valuations based on several multiples.
Based on our analysis of PostRock’s balance sheet, we are not surprised to see that its stock price has declined over the past 52 weeks. The other companies have had a good run; are they now overvalued?
The median Price/Earnings ratio for companies in the energy sector is 24.65X; the average PE is 39.57X. On a PE basis, it would appear that all of these companies, with the exception of PETD, are undervalued.
The Price/Sales ratio is another popular method for establishing valuation. The median PSR for the energy sector is 2.69X and the average is 5.55X. The PSR metric suggests these companies are undervalued.
The median Price/Book ratio is 2.31X and the average PBV ratio is 5.0X. Again, these companies, with the possible exception of XOM, look undervalued.
We are very interested in valuation metrics utilizing Enterprise Value. Looking at EV/EBITDA, we find the sector median to be 11.49X and the average 21.03X. The EV/Sales median is 3.57X; the average is 6.22X. The median value of EV/Invested capital is 1.78X and the average is 16.2X.
As a group, we feel that these companies are, indeed, undervalued. Our best ideas are Chevron, ConocoPhillips and ExxonMobil.