Now that Memorial Day Weekend has come and gone, the U.S.'s summer driving season is underway. While Marketwatch reports that gas prices may have already reached their summer high, Investing.com notes that decreasing gasoline inventories may suggest that the summer driving season will be stronger than analysts previously expected. With this in mind, we decided to look for promising, value opportunities amongst U.S. oil stocks.
To create the following list, we began with a universe of U.S. oil stocks. We screened that universe for those that appear undervalued relative to the Graham Number. The Graham Number is a measure of maximum fair value created by the "godfather of value investing" Benjamin Graham.
It is based on a stock's EPS and book value per share (BVPS).
Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)
The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.
Finally, we looked for those with a bullish sentiment from institutional investors, with significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to outperform into the future.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.
Do you think hedge funds are wise to invest in these oil stocks? Use this list as a starting point for your own analysis.
1. Swift Energy Co. (SFY): Engages in developing, exploring, acquiring, and operating oil and natural gas properties in Louisiana and Texas.
- Market cap at $613.54M, most recent closing price at $14.15.
- Net institutional purchases in the current quarter at 4.5M shares, which represents about 10.64% of the company's float of 42.28M shares.
- Diluted TTM earnings per share at 0.56, and a MRQ book value per share value at 24.18, implies a Graham Number fair value = sqrt(22.5*0.56*24.18) = $17.45. Based on the stock's price at $14., this implies a potential upside of 24.68% from current levels.
During the first quarter of 2013, Swift Energy reported $7.2 million in earnings, or $0.16 per diluted share. This reflects a 96% increase from the first quarter of 2012 when the company had $3.6 million in earnings, or $0.08 per diluted share. Swift Energy's revenue rose 8% in the most recent quarter to $146.2 million from $135.9 in the same period last year. The company benefited from increased oil production and higher gas prices. However, gross margins decreased from 78.54% to 77.16%.
Swift Energy's performance over the last month has paled in comparison to industry competitors. Since April 30th, the stock returned 9.35%, much lower than Chesapeake Energy Corporation (NYSE:CHK) and Apache Corp. (NYSE:APA), which returned 15.30% and 14.71% during the same time period. Only Energy Partners Ltd. (NYSE:EPL) performed worse, returning -5.39%.
In the company's first quarter earnings call, CEO Terry Swift stated that the company expects to have high-value activity in the Eagle Ford shale after a transaction takes place at the end of the third quarter. In other shale news, Swift Energy submitted a permit application to the state of Colorado earlier this month for drilling the first of two exploratory horizontal shale-oil wells in La Plata County. The Durango Herald reports that if approved, it would be the first instance of horizontal shale drilling in the county.
2. Alon USA Energy, Inc. (NYSE:ALJ): Operates as an independent refiner and marketer of petroleum products in south central, southwestern, and western regions of the United States.
- Market cap at $1.13B, most recent closing price at $18.11.
- Net institutional purchases in the current quarter at 3.2M shares, which represents about 15.56% of the company's float of 20.57M shares.
- Diluted TTM earnings per share at 2.43, and a MRQ book value per share value at 9.79, implies a Graham Number fair value = sqrt(22.5*2.43*9.79) = $23.14. Based on the stock's price at $17.47, this implies a potential upside of 32.43% from current levels.
Alon reported $54.2 million in net income, or $0.86 per share, in the first quarter of 2013, which is a 284.4% increase from the company's net loss of $(29.4) million, or $(0.52) per share last year. The company's revenue decreased by 7.86% to $1.65 billion from the same period in 2012. Meanwhile, gross margins increased from 9.68% to 16.53%.
Alon's performance over the last month has been in line with the rest of its industry. The company has returned 10.49% since April 30th, beating competitors Western Refining Inc. (NYSE:WNR) and Northern Tier Energy LP (NYSE:NTI) but falling short of industry leaders Tesoro Corporation (TSO) and Valero Energy Corporation (NYSE:VLO), which returned 15.22% and 10.85% respectively.
At 6.96%, Alon's projected earnings growth rate over the next 5 years is lower than average and is significantly lower than analyst projections for Northern Tier Energy LP (projected EPS growth over next 5 years at 47.0%) and Tesoro Corporation (projected EPS growth over next 5 years at 11.14%).
This summer, Alon expects to begin to reap the benefits of converting to CBOB production at its Big Spring refinery. In the company's recent earnings call, CEO Paul Eisman stated that the long octane from the CBOB production enables the company to produce and sell high-value aromatic products and solvents, which have an annual value upgrade of $14 million over gasoline.
3. Delek US Holdings Inc. (NYSE:DK): Engages in refining, wholesaling, and marketing petroleum products in the United States.
- Market cap at $2.16B, most recent closing price at $36.05.
- Net institutional purchases in the current quarter at 13.2M shares, which represents about 35.97% of the company's float of 36.70M shares.
- Diluted TTM earnings per share at 5.05, and a MRQ book value per share value at 15.82, implies a Graham Number fair value = sqrt(22.5*5.05*15.82) = $42.40. Based on the stock's price at $34.67, this implies a potential upside of 22.29% from current levels.
Delek's year-over-year net income increased by 67.75% during the first quarter of 2013, rising from $46.2 million, or $0.79 per diluted share, to a record $77.5 million, or $1.28 per diluted share. The company attributed the growth to an expanded discount between West Texas Intermediate crude in Midland and West Texas Intermediate crude in Cushing. Delek also saw sizable year-over-year growth in revenue with an increase of 151.86%. Additionally, gross margins increased from 9.34% to 13.31%.
Delek has performed poorly since April 30th, especially when compared to industry competitors. While Valero Energy Corporation and Phillips 66 (NYSE:PSX) have returned 10.85% and 10.07%, respectively, Delek has returned 0.31% over the last month. Only Calumet Specialty Products Partners LP (NASDAQ:CLMT) performed worse, returning -7.15%.
Taking a look at conventional valuation ratios, Delek appears to be cheap relative to its peers. The stock's PEG ratio stands at 0.59, while its Price/Cash ratio stands at 3.64. Furthermore, the stock even looks cheap on a Price to Free Cash Flow basis, with a ratio of 6.74. For context, Valero Energy Corporation has a P/FCF ratio at 10.53 and Calumet Specialty Products Partners LP has a P/FCF ratio at 21.05.
Investors should note that short sellers think there's more downside to the stock, especially when comparing short float to industry averages. DK short float stands at 3.34%, which is equivalent to 2.11 days of average trading volume. This may not seem significant, but it is much higher than Phillips 66 (short float at 1.0%, representing 1.35 days of trading volume) and Calumet Specialty Products Partners LP (short float at 1.61%, representing 1.35 days of trading volume).
As for the summer, VP of Finance Danny Norris noted that Delek has performed maintenance on its El Dorado and Tyler refineries in preparation for increased seasonal demand. Furthermore, the company expects improved pipeline access in June to provide both refineries with roughly 105,000 barrels per day of West Texas Intermediate crude. Delek is also opening 4 convenience stores in the second quarter.
*Profitability data sourced from Google Finance. Revenue data sourced from Google Finance. All other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.