Low market cash flow multiples (EV/Ebitda) for oil and gas stocks are a sign of opportunity in buy recommendations including Chevron (NYSE:CVX) – 4.6 times, Petro-Canada (PCZ) - 3.3 times and XTO Energy (XTO) – 6.5 times. The low multiples would be appropriate if oil price were to decline to a long-term level of about $70 a barrel and natural gas price would be no higher than a long-term level of about $10 a million btu. Instead, we see long-term oil at $100 a barrel and a more likely ratio of oil price to natural gas price of 7 to 1, rather than the current extreme of 13 to 1.
The great bargain in natural gas justifies the new emphasis on the clean fuel from Mr. Barack Obama in his acceptance speech for his nomination as the Democratic candidate for U.S. President. We object to Mr. Obama’s previous support for a “windfall” profits tax on oil and his demonizing of our buy recommendation, ExxonMobil (NYSE:XOM). On the other side, the presumptive Republican nominee has picked a vice presidential running mate who has been unfriendly to oil producers. Governor Sarah Palin has promoted a “windfall” profits tax on Alaskan producers that reaches 50% before consideration of Federal income tax. The Palin tax effectively delays the Alaskan natural gas pipeline for another generation, in our opinion. Back to the numbers, estimates for Next Twelve Months cash flow (Ebitda) have been rolled forward to the period ending September 30, 2009 from the period ending June 30, 2009 with little effect on the relative ranking by market cash flow multiple.
Originally published on September 2, 2008.