In this second article of a two-part series, I take a look at three more oil and gas stocks – one North American exploration / production company and two service providers -- to determine if they are truly undervalued.
Devon Energy Corp. (NYSE:DVN) – This large-cap North American exploration and production company is currently trading near $63 a share. Its dividend yield is 1.1 percent, or $0.68. Earnings per share is $13.60, and price to earnings ratio is 4.61. Market capitalization is $26.11 billion, and enterprise value is $27.68 billion. Operating margin is strong at 38.10 percent. Its payout ratio is very low at 5 percent. The company has paid dividends since 1993, and management expects to continue paying regular quarterly cash dividends. DVN has outperformed the Dow Jones Industrial Average and the S&P 500 over the past ten years. It has underperformed the Russell 2000. A purchase of 11 shares ten years ago would have cost $18.57 a share. Today, it would be 200 shares worth $12,424, which is an increase of 234.61 percent. The calculation does not account for trading fees or dividend reinvestment.
DVN’s second quarter results were impressive. Net earnings came in 288 percent over the same period last year -- $2.7 billion versus $706 million. These results include a $2.5 billion gain on the sale of Brazilian assets, an item that analysts exclude from published estimates. Sales of oil, natural gas and natural gas liquids reached $2.2 billion, which was 23 percent higher than the same period last year. Management attributes the increase to higher production and higher prices. North American onshore production set a company record high. With the sale of its Brazilian assets, the company completed an international and Gulf of Mexico divestiture plan, adding $10 billion to total proceeds from sales. The plan was enacted to reposition the company with a clean balance sheet, rich inventory of productive interests, and an attractive cost structure. Nine wells in the Bone Spring area of the Permian Basin came online in the second quarter. First production from its Jackfish 2 oil sands project was achieved. Cana-Woodford Shale production increased by 80 percent over the second quarter 2010. Eight oil wells in Granite Wash came online in the second quarter. An additional 1.1 million acres for new drilling has been assembled as well. Management has also been focused on containing costs. Third quarter results are due out Nov. 2.
Chesapeake Energy Corporation (NYSE:CHK), another large-cap, domestic oil and gas exploration and production company, is currently trading near $27. Its dividend yield is 1.30 percent or $0.35. Earnings per share is $1.50, and price to earnings ratio is 18.18. Its market capitalization is $17.34 billion, and its enterprise value is $28.94 billion. Operating margin is 18.28 percent. Its payout ratio is 23 percent. The company began paying a dividend in 1997 but stopped after the second quarter 1998 for four years, until the third quarter of 2002. Ten years ago CHK closed at $7.08 a share. A 100-share investment would now be worth $2,731.00-- a 285.73 percent increase, excluding trading fees and reinvestment of dividends. It has outperformed the DJIA, the S&P 500 and the Russell 2000.
CHK’s second quarter results showed an increase in total production of 9 percent compared to the same quarter last year. Total revenue was $3.3 billion versus $2 billion for the same period last year. Total operating costs were up to $2.33 billion from $1.57 billion year over year. CHK’s CEO Aubrey McClendon recently came under fire for risky personal investment decisions he made in 2008 that cost him virtually all of his personal ownership in the company, then selling antique maps back to the company for millions, and then receiving a fat bonus. In the time since, under McClendon’s guidance, CHK has executed five key joint ventures that have added $3.3 billion in sales proceeds. More importantly, CHK retained majority ownership in the ventures. In effect, the company spent billions on land, sold enough interest in that land to more than cover its cost, then hold onto sufficient ownership to reap the future benefits of developing the assets. Its third quarter earnings conference call is set for Nov. 4 at 9 a.m. ET.
Though CHK is a promising investment that seems attractively priced, it is risky and lacks the diversity of interests that DVN offers. Its long-term outlook is also not as clear. DVN is a global player with a track record of solid performance.
Schlumberger Limited (NYSE:SLB) – This large-cap provider of drilling services worldwide is currently trading near $70 a share. Its dividend yield is 1.5 percent or $1. Earnings per share is $3.77, and price to earnings ratio is 18.52. Market capitalization is $94.29 billion, and enterprise value is $95.55 billion. Operating margin for the quarter ended June 30 is 16.10 percent. SLB’s payout ratio is 24 percent. The company has paid a dividend since 1957. Had an investor purchased 100 shares ten years ago at the closing price of $23.80,, the investment would now be worth $13,606.00. This takes into account a 2:1 stock split but does not account for trading fees or reinvestment of dividends. This is a 185.90 percent increase.
SLB released its third quarter results last week. Revenue was up 6 percent to $10.23 billion from $9.62 billion in the second quarter 2011 and up from $6.85 billion for the same period last year. Revenue of $9.55 billion from its Oilfield Services unit was up 6 percent over last quarter and 44 percent over the same period last year. Revenue from its Reservoir Characterization unit was also up, as was revenue from both its Drilling unit and its Reservoir Production unit. Increases were the greatest in North America, thanks to seasonal fluctuations in business, higher activity on land in the U.S., and increased work in the Gulf of Mexico.
Net income, however, fell to $1.3 billion from $1.73 billion for the same period last year. This drove the share price down. Company officials attributed the less-than-expected results to turmoil in the global economy and a consequent lowered outlook for growth in oil demand next year, though -- at this time -- performance is still expected to be higher than this year.
Baker Hughes Inc. (NYSE:BHI), a wellbore products and drilling services supplier, is currently trading near $57 a share. Its dividend yield is 1.1 percent or $0.60 a share. Earnings per share is $3.01, and price to earnings ratio is 18.79. Market capitalization is $24.64 billion, and its enterprise value is $26.44 billion. Operating margin is 12.9 percent. Its dividend payout ratio is 20 percent, and it also has a long payment history. BHI was trading around $33 a share 10 years ago. BHI will release its third quarter results on Nov. 1.
Though BHI may offer opportunities in light of its upcoming earnings release, SLB is a promising longer-term investment that has taken a short-term hit from current events. Its worldwide services are geographically diverse. Management is committed to performance, and the outlook for oilfield services, particularly in North America, remains bright.
Haliburton Company (NYSE:HAL) – This oil and gas industry service provider is currently trading near $35 a share. Its dividend yield is 1.1 percent or $0.36. Earnings per share is $2.76, and price to earnings ratio is 12.73. Market capitalization is $32.32 billion, and enterprise value is $34.15 billion. Operating margin for the quarter ended Sept. 30 is 18.66 percent. Payout ratio is 13 percent. HAL has paid dividends since 2006. Ten years ago, HAL was trading at $12.48 a share. A purchase of 100 shares then would now be worth 200 shares at a total value of $7,024.00, which is a 181.52 percent increase. The calculation does not include trading fees or reinvestment of dividends.
HAL released third quarter results last week. Total revenue reached $6.55 billion, up from $$4.67 billion for the same quarter last year and $5.94 billion for the previous quarter 2011. Activities in North America continued to produce the most revenue and operating income. HAL purchased Multi-Chem Group LLC in October to strengthen its offerings. The company introduced its RapidFrac system, which is a horizontal sliding sleeve completion system used in the final stages of hydraulic fracturing. HAL also completed the first horizontal shale gas well in Argentina’s Neuquén Basin / Los Molles shale formation for Apache Corporation (NYSE:APA).
Transocean Ltd. (NYSE:RIG), an offshore contract drilling service provider, is currently trading near $55 a share. Its dividend yield is 5.8 percent or $3.16 a share. Earnings per share is $0.11, and its price to earnings ratio is 493.04. Market capitalization is $17.66 billion, and enterprise value is $25.55 billion. Operating margin is 19.86 percent. Its payout ratio is 718 percent. RIG paid two quarterly dividends of $0.79 each this year. Prior to this, the company had not paid a dividend since May of 2002, when it paid two quarterly dividends of $0.03 per share. Ten years ago RIG was trading near $30 a share. RIG has slightly outperformed the DJIA and the S&P 500 over the past ten years. Its performance is about even with the Russell 2000.
Investors believe RIG is positioned for growth, as evidenced by its very high price to earnings ratio. Its payout ratio does not look sustainable, though. HAL has positioned itself to emerge from issues associated with the Deepwater Horizon incident of 2010 and capitalize on developing its North American assets. The company has the resources and the management expertise to ride out any challenges posed by global macroeconomic events. Though the company may not appeal to dividend investors, others may find opportunities for growth triggered by an industry that is poised to flourish in the longer term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.