Kurt Wulff (McDep Associates) recommends Imperial Oil, Devon Energy, Gazprom, and Exxon on the basis of their recent quarterly results. Wulff submits:
Imperial Oil (IMO): A strong finish to 2005 for buy-recommended Imperial Oil supports higher projections for 2006 that contribute to an increase in estimated net present value to US$90 from US$84 a share. Present value does not count much for oil sands at a proposed new mining project, Kearl, nor additional volume at the company’s Cold Lake project. Nor are we counting the more than 2 trillion cubic feet of Arctic natural gas that awaits a long-deliberated pipeline. Thus, a relatively high McDep Ratio for Imperial compared to buy-recommended peers could ultimately be justified for patient investors.
Devon Energy (DVN): Favorable fourth quarter results and an exceptional increase in proven reserves sparks an increase in our estimate of net present value for buy-recommended Devon Energy to $94 a share from $86. Stock price has 42% appreciation potential to NPV that presumes a long-term oil price of $50 a barrel. Futures investors price Light, Sweet Crude Oil at $67 a barrel for the next six years.
DVN’s McDep Ratio incorporating our new estimate of present value is lowest among large cap independent producer peers. Unlevered cash flow multiple is remarkably low at 3.7 times while adjusted reserve life of 8.6 has moved closer to the median of 9.2 years. Mainly a North American natural gas producer with special emphasis on the Barnett Shale in Texas, Devon also has oil potential in oil sands, deep Gulf of Mexico, Azerbaijan and Brazil. Though the stock has commodity risk, Chairman Larry Nichols has compiled an admirable record through strong and weak cycles since founding the company with his father in 1971.
Gazprom (OGZPF): We raise our estimate of net present value of buy-recommended Gazprom to $140 a share from $120 following the release of results for the third quarter of 2005 on January 30. Natural gas price and cash flow multiple outline potential appreciation of eight times from current stock price. The company’s average natural gas selling price near $2 a million btu in the quarter just reported, would average about $3.50 in 2006 by our projections.
To be equivalent to the new high futures price of $70 a barrel for oil delivered over the next twelve months, natural gas would be $14 a million btu, or four times what we expect for Gazprom in 2006. The company’s rich resource position likely could ultimately justify an unlevered cash flow multiple, EV/Ebitda of perhaps twice its current 6.4 times on 2006 estimates. Meanwhile the administrative details are being worked out to trade shares more widely in the U.S. Also within several months, the weighting of Gazprom stock in the main international equity index is expected to increase from some 0.4% to about 3.7% as reported by Bloomberg and others.
Exon Mobil Corporation (XOM): Fourth quarter earnings reported on January 30 reflected improving global industry conditions while stock price for buy-recommended Exxon Mobil Corporation may correspond to a long-term oil price of perhaps just $43 a barrel. The stock offers 17% appreciation potential to estimated net present value of $74 a share that presumes a long-term oil price of $50 a barrel. Futures investors price Light, Sweet Crude Oil at $68 a barrel for the next six years.
Among mega cap peers XOM has the second highest unlevered multiple of cash flow at 5.3 times. Adjusted reserve life at 11.2 years is the highest among peers thereby justifying higher cash flow multiple. The mega cap has a mix of business close to the median of peers with a slight tilt to natural gas. The Standard of Value, Exxon has delivered superior investment performance for decades and decades.
Note: Analysis originally published between January 31-February 3.
Kurt Wulff's McDep Associates offers realtime, independent research services for investors in the energy and utilities sectors. For more information, go to www.mcdep.com or email Mr. Wulff at email@example.com.