Upstream Oil And Gas Stocks: 2 To Buy, 2 To Avoid

 |  Includes: APC, DNR, MRO, NBL
by: Stock Croc

Upstream oil and gas stocks, those without refining or retail activities, have had a difficult eighteen months. Domestically, the Gulf of Mexico disaster was not just an environmental and cultural catastrophe, it also took a toll on various oil producers. Of course, foreign oil supplies are never truly secure, and the administration is ambivalent on Canadian tar sands oil. While trillions of cubic feet natural gas are under our feet, the proliferation of new hydraulic fracturing techniques has helped lead to a glut of natural gas, and prices have fallen by about 70% since 2008. Against this backdrop, I will look at four large oil and gas producers to see how they are coping with these and other challenges. I believe these four stocks will provide the best analysis of current upstream oil market conditions.

Marathon Oil Corp. (NYSE:MRO)

A year ago, Marathon was a major, integrated oil and gas producer and retailer. On July 1, 2011, Marathon spun off its refining, retail, and transportation arms to shareholders as a new company, Marathon Petroleum Corp. (NYSE:MPC) As a result, Marathon exists as one of America's largest upstream producing companies.

Marathon stock was trading recently at almost $33 per share. Its 52 week range is from $54.33 to $19.13. That is a little misleading, as Marathon's post-spin-off high has been $34.07. It is currently trading at a price to earnings ratio of 8. It has a market capitalization of $23.1 billion, and its quarterly dividend was recently raised to $0.17, for a yield of 2.1%.

Marathon is performing very well as an independent oil and gas producer. In its fourth quarter of 2011, Marathon posted earnings of $552 million, or $0.78 per share. For all of 2011, after adjusting for assets spun off, Marathon had earnings of $2.29 billion, or $3.21 per share, compared to adjusted earnings in 2010 of $1.89 billion, or $2.66 per share.

Marathon has had its troubles in Africa and Asia, and has made a sensible commitment to focus on domestic assets. Analysts foresee per share earnings in 2012 and 2013 of $3.66 and $4.38, respectively. With growth like that, and a sterling balance sheet, I see Marathon as a long-term buy.

Anadarko Petroleum Corp. (NYSE:APC)

Anadarko is working to recover from a rough 2011, which was highlighted by its $4 billion settlement with BP, PLC (NYSE:BP) on account of Anadarko's role in the Gulf oil spill. Anadarko stock was recently trading at about $87 per share, very close to the high end of its 52 week range of from $88.21 to $57.11. It has a market capitalization of $43.1 billion, and pays a quarterly dividend of nine cents per share, for a yield of 0.4%. Anadarko does not have a price to earnings ratio, as the huge BP settlement amount led to a net loss for the preceding 12 months.

Anadarko did have a successful fourth quarter of 2011. Earnings, after adjustments for one time events, were $423 million, or $0.85 per share. This was a 37% positive surprise to analysts, who had forecast a mean $0.62 per share. Removing all the one time charges, annual earnings were $3.37 per share.

Operationally, Anadarko is reaching across a huge swath of the planet, from Mozambique to the Gulf of Mexico, in search of resources. However, it really is all about market prices. Anadarko's investments in shale properties may lie fallow if natural gas prices remain depressed.

With Anadarko stock near its all time high, I am not comfortable with an investment in this company at this time. I need to see a clean quarter or two before endorsing this equity without qualification. For now, there are better choices out there.

Noble Energy, Inc. (NYSE:NBL)

Noble is a large, independent oil and natural gas producer with assets in the Gulf, Africa, and Mediterranean Sea. It also has shale gas assets in North America. Its stock was trading recently at about $104 per share, near its all time high price, as well as the top of its 52 week range of from $105.00 to $65.91. It is trading at a price to earnings ratio of 20, and has a market capitalization of $18.4 billion. It pays a quarterly dividend of $0.22 per share, for an annual yield of 0.9%.

Noble has a long history of steady earnings, but it too suffered a GAAP loss in the fourth quarter as a result of derivative and impairment losses. Excluding one time events, Noble's fourth quarter earnings were $211 million, or $1.18 per share. All told, and adjusted for one time events, Noble earned $5.26 per share in 2011. Analysts are expecting $6.38 per share in 2012, and $8.61 in 2013. Yet, if natural gas prices remain depressed, those estimates are a pipe dream.

At its high current price to earnings ratio, I simply do not see enough upside over the next two years to justify an endorsement in Noble. If I owned it, I would hold it, but it is overvalued for new investors.

Denbury Resources, Inc. (NYSE:DNR)

Denbury is another independent oil and gas producer, which historically has focused on the Gulf of Mexico. Denbury purchased Encore Acquisition in 2010, to give Denbury natural gas resources in the Rocky Mountain states. Despite this, especially when compared with other independents, Denbury is an oil company.

Denbury stock was trading recently at between $19 and $20 per share. Its 52 week range is from $26.03 to $10.20, and it is trading at a price to earnings ratio of 14.8. It has a market capitalization of $7.8 billion, and does not offer a dividend.

In the fourth quarter of 2011, Denbury posted earnings net of one time events of $86.9 million, or $0.22 per share. Analysts look for earnings to grow from 2011's $1.21 per share, to $1.33 in 2012, and $1.43 in 2012. Denbury also is selling $155 million in non core assets to help fund a share buyback plan.

Denbury is a leader in utilizing carbon dioxide to force old oil fields into a second life, much as hydraulic fracturing has done with shale gas. This efficiency of its fields separates Denbury from the rest. So does the fact that is less encumbered by natural gas prices than other producers. I can see Denbury stock doubling by year end 2013, and this is probably my favorite play among independent upstream producers. Take a look.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.