In this article I take a look at Chesapeake (CHK), Chevron (CVX) and Petroleo Brasileiro (PBR); three energy companies that may offer investors upside potential that outweighs the risks.
We'll use the management effectiveness ratios, book value-share, price-sales and price-book value to evaluate Chevron, Chesapeake and Petroleo Brasileiro.
Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is contracting.
European officials are working towards recapitalizing the banks in Spain. Also, European officials are investigating pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented, and Spain's banks are recapitalized, sovereign risks remain.
Rating System
Buy - Be long
Neutral - No position
Sell - Be short
(The ratings, research and analysis in this article should be considered as starting point for further research.)
Chesapeake - Sell
Company v. Industry (TTM)
- Return on Assets: 4.77 v. 12.52
- Return on Investment: 5.75 v. 17.56
- Return on Equity: 13.42 v. 18.69
According to the firm's financial statements, current assets increased in the first quarter of this year compared with the fourth quarter of 2011. Additionally, current assets are less than current liabilities; the firm is illiquid. The financial leverage ratio is just over two.
Total revenue in the first quarter, compared with the year-ago quarter, increased substantially. The increase is mostly attributable to revenue from oil and gas.
In the first quarter of 2012, earnings were high quality; although, cash from operations wasn't enough to cover cash used in investing. Additionally, the firm is generating cash from financing. Cash from financing is from credit facilities borrowing and sales of assets.
| Baseline | Alternative Baseline | Adverse | |
| 2012 | $15 | $13.50 | $20 |
| 2013 | $11.50 | $10 | $18 |
| 2014 | $13 | $12 | $13 |
In the baseline scenario, the holding period's rate of return is roughly 36 percent over the next year and a half. In the alternative baseline scenario, the hold period's rate of return is roughly 44 percent over the next year and a half. The adverse scenario suggests the holding period's rate of return is roughly 27 percent, but occurs in 2014. The current priced used for estimates is $18. The return assumptions do not include dividend payments as skillful investors may be able to negate the costs of dividends.
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Book value-share is increasing; the increase in book value-share is considered bullish.
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The share price is declining; a declining share price is bearish. The share price is expected to continue to decline as the U.S. economy enters a recession in the months ahead.
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Price-sales is declining; the enterprise is getting cheaper, although, the decline is mostly caused by a decline in share price, not an increase in sales. Sales are forecast to decline in the coming months.
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Price-book value is declining; the enterprise is getting cheaper, although, the decline is mostly caused by a decline in share price, not an increase in book value.
Chevron Corp. -- Sell
Company v. Industry (TTM)
- Return on Assets: 13.31 v. 5.68
- Return on Investment: 16.02 v. 6.90
- Return on Equity: 23.05 v. 9.48
According to the firm's financial statements, current assets increased in the first quarter of this year compared with the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is under two.
Total revenue in the first quarter, compared with the year-ago quarter, increased. The increase is mostly attributable to revenue from sales and other operating revenue.
In the first quarter of 2012, earnings were high quality. Cash from operations was enough to cover cash used in investing and financing activities.
The macro-economic risks from potential fiscal consolidation in the U.S. and European Union could cause valuations to decline farther.
Some investors may want to protect long positions by buying put or selling call options.
| Baseline | Alternative Baseline | Adverse | |
| 2012 | $85 | $80 | $90 |
| 2013 | $75 | $70 | $85 |
| 2014 | $80 | $75 | $80 |
In the baseline scenario, the holding period's rate of return is roughly 25 percent over the next year and a half. In the alternative baseline scenario, the hold period's rate of return is roughly 30 percent over the next year and a half. The adverse scenario suggests the holding period's rate of return is roughly 20 percent, but occurs in 2014. The current price used for estimates is $100. The return assumptions do not include dividend payments as skillful investors may be able to negate the costs of dividends.
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Book value-share is increasing; the increase in book value-share is considered bullish.
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The share price is increasing; although, recently the share price has declined and should continue to decline.
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The enterprise is getting cheaper on a price-sales basis; however, sales are forecast to decline.
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Price-book value is declining and is near the 2011 low. The valuation metric should decline farther.
Petroleo Brasileiro -- Sell
Company v. Industry (TTM)
- Return on Assets: 6.35 v. 5.33
- Return on Investment: 7.18 v. 6.50
- Return on Equity: 11.18 v. 8.92
According to the firm's financial statements, current assets decreased in the fourth quarter of last year compared with the third quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is 1.81.
Total revenue in the first quarter, compared with the year-ago quarter, increased almost 15 percent.
In the first quarter of 2012, earnings were high quality. Although, cash from operations wasn't enough to cover cash used in investing. The firm increased cash using financing activities.
The macro-economic risks from potential fiscal consolidation in the U.S. and European Union could cause valuations to decline farther.
Some investors may want to protect long positions by buying put or selling call options.
| Baseline | Alternative Baseline | Adverse | |
| 2012 | $16 | $14 | $20 |
| 2013 | $10 | $8 | $18 |
| 2014 | $14 | $12 | $14 |
In the baseline scenario, the holding period's rate of return is roughly 44 percent over the next year and a half. In the alternative baseline scenario, the hold period's rate of return is roughly 55 percent over the next year and a half. The adverse scenario suggests the holding period's rate of return is roughly 22 percent, but occurs in 2014. The current price used for estimates is $18. The return assumptions do not include dividend payments as skillful investors may be able to negate the costs of dividends.
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Book value-share is decreasing; the decrease in book value-share is considered bearish.
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Recently, the share price has declined and should continue to decline.
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The enterprise is getting cheaper on a price-sales basis; however, sales are forecast to decline.
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Price-book value is declining and is near the 2011 low. The valuation metric should decline farther.
Macro Environment
| Baseline | Alternative Baseline | Adverse | |
| 2012 | +2.3 | +1.8 | +1.8 |
| 2013 | -0.5 | -1.5 | +1.5 |
| 2014 | +2.4 | +1.6 | -0.5 |
In the baseline scenario, I see growth continuing through 2012 with a recession in 2013 and growth resuming in 2014. Under the alternative baseline scenario, growth this year is slower than the baseline scenario and the recession in 2013 is deeper. In the adverse scenario the recession occurs in 2014. Under the baseline and alternative baseline scenarios, U.S. equities are in a bear market during 2012 and/or 2013.
ISM Non-manufacturing PMI is declining; the decline in non-manufacturing PMI is considered bearish. ISM non-manufacturing PMI should stabilize in the coming months.
The pace of job growth has slowed in recent months and may stabilize at low levels.
CB consumer confidence is increasing and may decline in the coming months. The Expectation Index and the Present Situation Index both declined, according to the latest report.
European Union services PMI is declining and should increase in the coming months.
European Union manufacturing PMI is declining and should increase in the coming months. A silver lining from the current release of the report is that the pace of decline in Italian manufacturing is slowing. Additionally, the depth of the contraction in manufacturing has yet to reach the depth of the contraction from the financial crisis in 2009.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial adviser. Christopher Grosvenor does not know your financial situation and ability to bare risk and thus his opinions may not be suitable for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
