Energy stocks have been volatile recently, and have been sold off on concerns about global economic growth and the outlook for the price of oil and other petroleum products. However, this price weakness might be an opportunity to add some of the highest quality energy names on a P/E, yield, and petroleum refining growth.
Exxon Mobil (XOM) – The kingpin of the energy group and one of the largest companies in the world, XOM continues to be favored by the best and brightest investors. While still the largest, its competitors are BP plc (BP), Chevron (CVX), ConocoPhillips (COP), and other foreign major integrated oil and gas companies. XOM remains in the list of top investor holdings, including that of Warren Buffet, for many reasons.
XOM has a world-class management team, attractive valuation, incredible cash flow generation, strong balance sheet, and a nice dividend that make for a safe bet in this volatile stock market. If there is a downside to its story, it would be its huge size that limits its growth, and the volatile nature of the energy business in which it operates. However, these negatives can also be seen as opportunities, as XOM continues to invest heavily in technology to seize growth opportunities that many smaller companies do not have the resources to pursuit.
While its reasonable valuation and moderate growth produce an overall fair valuation, XOM has a dividend yield of 2.5%. XOM management has historically done a good job of maximizing shareholder value. We expect it will continue to do so, and increase the dividend growth as one of its methods. XOM’s dividend has consistently grown for three decades, adding stability and return for investors. XOM should continue to be a high quality holding for longer-term investors looking for total return, diversification and market-like growth and risk.
Hornbeck Offshore (HOS) – HOS is a specialty service provider in the energy sector that has interesting characteristics. HOS provides offshore supply vessels, a business that is sensitive to the phases of the cyclical energy industry. HOS’s direct competition is Tidewater (TDW) and Seacor Holdings (CKH), the largest of the group. Due to its economic sensitivity, HOS trades at a discounted valuation to many other types of energy companies.
HOS has rebounded from the shut-down in oil production in the Gulf of Mexico, as its business is anticipated to be back on track after losing money in 2011. Due to its earnings sensitivity, HOS is the kind of company that is first acquired by investors that anticipate an economic rebound. With the recent market decline and fresh hopes of the new efforts to keep the world economy out of a double dip recession, HOS was quickly bid back up close to its 52 week high.
We would be cautious with HOS at these price levels, as we are not convinced of the economic recovery. We believe economic uncertainty will continue, and cyclical companies like HOS will be volatile as a result. Growth oriented investors should watch HOS for now, and look to add it when it corrects again on new signs of economic uncertainty.
Noble Energy (NBL) – NBL is an exploration and production energy company with bright prospects. At first read, NBL looks like a market performer with a 1.2% dividend yield and P/E ratio of 16 times 2011 earnings. However, the other view is that NBL is a quality play on the potential for the energy sector out-performing from the continuation of the long-term commodity theme.
Many investors believe that commodities will continue to be the leadership of the market, from global demographics and improved financial strength of emerging markets. If this view becomes the reality, NBL should participate and its investors benefit as earnings are expected to jump 40% in 2012, and NBL currently trades at a reasonable 11 times next year’s earnings estimates. However, if the economy does not recover, NBL is in-line with the general market’s valuation and dividend yield.
While more volatile than the overall market due to the cyclical nature of its business, NBL’s size and strong balance sheet should help investors endure the added volatility in a diversified portfolio. NBL is a strong player in its field, third only to Anadarko Petroleum (APC) and Chevron (CVX). Growth investors would be wise to accumulate the stock for its out-performance potential while it is still 20% off its recent highs.
CVR Energy (CVI) – CVI is a small, lesser known company with a lot going for it. The largest company in its space is Anixter International (AXE), another small cap company. It has impressed the investment community with its business execution and growth prospects. CVI is expected to grow revenue by almost 25% this year, and more than 10% next year.
CVI has been accumulated by some of the best respected investors, and is rated as a buy by all six analysts that follow the company. Its popularity is a product of its unique business mix; petroleum refining and remaining exposure to a spun-off company (CVI Partners) in fertilizer chemical manufacturing. As the economy has contracted, so has the outlook for the fertilizer business. However, the economic contraction has brought petroleum prices down, a benefit for its refining business. Longer-term, fertilizer chemicals should benefit from strong global demographic trends and commodity demand.
This situation has enticed savvy investors that believe the current price is an attractive entry point for a company with both strong cash flow and growth prospects that may not be fully factored into the current price. Shares for CVI Partners could be distributed to CVI shareholders as a way to both attract investors and complete the fertilizer divestiture. For investors seeking special situations, CVI could be an interesting play.