Rearranging an Energy Portfolio Geographically

We continue to like the same stocks after suspending buy recommendations on Friday as the recent adverse stock price trend may be suggesting more patience (see Meter Reader Flash, September 5, 2008 - pdf file). For deciding what to do with stocks now owned, we recommend overweighting natural gas, keeping a global spread of companies, large and small, and participating in income stocks. Judge the size of holdings by Enterprise Value rather than Market Cap and keep the McDep Ratio in mind. To help with the portfolio analysis, we create a new table with all covered stocks rearranged geographically. The former recommended geographic weightings, still reasonable while recast in a new look, underweight U.S. Integrated and Europe, equal weight Brazil, Russia and China and overweight U.S. Independent and Canada. We discuss below examples of current interpretations for some specific stocks. Finally, taxable investors who may have tax losses from recent purchases might realize them while preserving investment exposure by swapping shares in similar companies.

Small Premium in Marathon for Restructuring

Down in price like most stocks, Marathon Oil (MRO) might warrant investor reconsideration in our new U.S. Integrated group. Already a small company relative to mega caps in the four-company peer group, Marathon may restructure itself voluntarily into two smaller pieces as recently announced. Smaller pieces are easier to swallow in an acquisition. At a McDep Ratio of 0.70, Marathon stock is ten percent more expensive than the median, but still low in terms of resource and business value as we measure it.

Shift Emphasis from BP to StatoilHydro

A recent sharp decline in price for StatoilHydro (STO) may be an opportunity for switching some BP plc (BP) into the Norwegian company for a modest valuation advantage and increased emphasis on Rest of World Natural Gas that we like.

Petrobras More Tempting

We believe the equal weighting at 18% is reasonable in the Brazil/China/Russia geographic sector at the same time some investors may be more concerned about political risk in Russia. In that case, some Russian emphasis might be shifted to Brazil. Petrobras (PBR) with its large discoveries offshore Brazil is now available at a lower stock price.

Whopping Weighting in U.S. Independents

Aggregating our formerly recommended Income and Small Cap Independents with Large Cap Independents creates a new U.S. Independent sector with a 41% weighting compared to 11% for the current market weighting by Enterprise Value compared to all the stocks we cover. Here is where we get the building blocks for overweighting natural gas with eight stocks having more than 50% concentration on the underpriced fuel.

Overweight Canada

Past favorites Canadian Oil Sands Trust (COSWF.PK) and Encana (ECA) should continue to appeal to patient energy investors. With the consolidation that has taken place in the income trust sector there is less differentiation now among Penn West Energy Trust (PWE), Enerplus (ERF) and Pengrowth (PGH).

Six-Year Oil Futures at 40-Week Average

The futures market quote for oil for delivery over the next six years of $109 a barrel now matches the 40-week average at the intersection between a rising trend and a declining trend by that measure. The other three six-year and one-year measures have turned to a declining trend in recent weeks.

Originally published on September 9, 2008.

Comments

[kj:]

Kurt,

Do you have a comparison of the various Canadian Trusts and US MLPs in terms of dividend yield, % of FCF devoted to dividends, hedged book...? I'm trying to determine what energy companies have the safest dividends. Thanks.

2008 Oct 07 05:22 PM

[AMC:]

Does anyone have any insight into why PGH has been dropping? I haven't been able to find any news on this matter and the stock is just continuing to plummet. This appears to be affected by MASSIVELY DEFLATIONARY forces here. Anyone care to share insight?

2008 Oct 08 12:51 PM

[X-15:]

Peak Oil still applies.

Throwin the baby out with the bathwater is now ragin-

Go for dividend play with good prospects.

Iran, Nigeria, declining fields of major reserves aka Mexico, Prudoe Bay, NorthSea Oil, et al -perhaps even Saudi reserves gives rise to big returns somewhere down the road.
Canadian Oil might provide a currency appreciation also.

If you have testes of steel

2008 Oct 09 10:00 PM

[Alan von Al...:]

I agree with X-15 on dividends and multinationals. Avoid Canadian tar sands and small cap Bakken crap. Actually, there's no reason to invest or remain invested in oil for the foreseeable future.

2008 Oct 10 04:37 AM