What follows is a list of energy companies that cover a variety of different industries: oil equipment and integrated oil & gas. I find the best upside case exits for Marathon Oil due to its high spread between the past and forward multiples. While I am optimistic about Baker Hughes, I believe that the fallout between BP (BP) and its various contractors, such as Halliburton (HAL), add a significant headwind to value creation. The company also has the lowest divined yield and the highest beta, which is evidence that it also carries the most risk.
Baker Hughes (BHI)
Baker Hughes trades at a respective 10.3x and 7.7x past and forward earnings with a dividend yield of 1.5%.
Consensus estimates for Baker Hughes' EPS forecast that it will grow by 16.4% to $4.89 in 2012 and then by 17.4% and 20.2% in the following two years. Assuming a multiple of 9x and a conservative 2013 EPS of $5.68, the rough intrinsic value of the stock is $51.12, implying 25.2% upside. During the fourth quarter, the company struggled domestically under a variety of cost and efficiency challenges. Difficulties in managing freight, fuel, and logistics will also make investors skeptical about contracting during a full recovery, especially after the Halliburton-BP debacle. Fourth quarter results were, ultimately, 8.3% below consensus. ONn the positive side, ROE is trending towards a 14.1% in 2013 - a 260 basis points improvement - as leverage holds steady.
Valero trades at a respective 7.4x and 6.4x past and froward earnings with a dividend yield of 2.2%.
Consensus estimates for Valero's EPS forecast that it will grow by 6.2% to $3.59 in 2012, grow by 15.6% in 2013, and then fall by 24.8% in 2014. Assuming a multiple of 8x and a conservative 2013 EPS of $4.10, the rough intrinsic value of the stock is $32.80, implying 20.1% upside. Valero has a strong domestic natural gas cost advantage - a strength that is likely going to be leveraged for increased buyback activity. Capex is likely to become more efficient (ie. declining by around $1B from last year) as the hydrocracker projects kick into full gear. Valero is also positioned to gain market share with its access to key export markets.
Marathon Oil (MRO)
Marathon trades at a respective 13.2x and 7.2x past and forward earnings with a dividend yield of 2.2%.
Consensus estimates for Marathon's EPS forecast that it will grow by 14.6% to $3.68 in 2012, grow by 20.4% in 2013, and then fall by 2.5% in 2014. Assuming a multiple of 9x and a conservative 2013 EPS of $4.39, the rough intrinsic value of the stock is $39.51, implying 25% upside. Management typically sets the bar low for guidance, which allows for higher risk-adjusted returns. Excellent production in Eagle Ford, Bakken, Anadarka, and Noiobrara are also not being fully appreciated by the market. Management has also showcased confidence over the fundamentals by returning a significant amount of free cash flow to shareholders. It is also improving efficiency at onshore plays, which will help maximize gains from greater economic activity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.