Despite improvement in domestic employment figures, global economic growth has been disappointing. Energy firms are well positioned to gain from greater industrial activity and investors can realize higher risk-adjusted returns from the macro uncertainty. The Street is currently bullish about CONSOL Energy (CNX), Cabot Oil & Gas (COG), and Marathon Oil (MRO). Based on my review of the fundamentals, multiples, and DCF model, I find the strongest upside at Marathon.
From a multiples perspective, Marathon is the cheapest of the three. It trades at a respective 13.7x and 7.4x past and forward earnings with the highest dividend yield of 2.1%. As CONSOL is an energy company, these figures should be compared more with those of Cabot. Cabot trades at a respective 48.6x and 36.1x past and forward earnings with a dividend yield of 0.2%. Although CONSOL warrants trading at a premium due to its takeover potential, there is plenty of room for multiples to expand for Marathon.
CONSOL trades at a respective 13.5x and 11.7x past and forward earnings with a dividend yield of 1.3%. It had a very active third-quarter earnings as it started to realize benefits of greater scale from taking over Dominion's E&P business. The fourth-leading coal producer is known for its lean operations, but it also has a strong risk profile. CONSOL has relatively hedged well against pricing headwinds for thermal and met coal among industry players.
Consensus estimates for CONSOL's EPS forecast that it will decline by 8.3% to $2.77 in 2012, and then by 15.2% and 16.6% in the following two years. Of the 27 revisions to estimates, 23 have gone down for a net change of -23.2%. Assuming a multiple of 14.5x and a conservative 2013 EPS of $3.15, the rough intrinsic value of the stock is $45.68, implying 22.2% upside.
While CONSOL is rated a "strong buy" on the Street, Cabot and Marathon are both rated just a "buy." Cabot is diversifying interests across a variety of new energy markets. The company owns 200K acres in Marcellus; but, with heavy supply in the region, prices are lower than ideal. With the company's positions in Eagle Ford and Marmaton, the firm is a potential takeover target. Consensus estimates for Cabot's EPS forecast that it will grow by 28.6% to $0.63 in 2011 and then by 47.6% and 89.2% in the following two years.
Turning over to Marathon, we find a company that had third-quarter results that crushed expectations at an EPS of $0.90. The company repurchased an impressive $300M and is shifting toward greater sources of free cash flow through onshore plays while improving efficiency.
Consensus estimates for Marathon's EPS forecast that it will grow by 14% to $3.66 in 2011, grow by 20.8% in 2012, and then decline by 4.3% in 2013. Modeling a CAGR of 9.6% for EPS over the next three yeas and then discounting backward by a WACC of 9% yields a stunning fair value figure of $53.94, implying 64% upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.