Through the second quarter, six global energy companies with combined Enterprise Value of $1.3 trillion are producing more oil and gas, participating in recovering oil price and positioned for improving margins downstream. Their stocks are attractively priced at McDep Ratios ranging from 0.57 to 0.81. A McDep Ratio of 1.0 corresponds to an unlevered return of 7% a year after inflation. The estimated return presumes a long-term real price of $75 a barrel for oil that trades currently at an average $82 a barrel for the next six years in the futures market. Financial risk is low with debt ranging from 0.09 (“AAA” quality) to 0.25 (“A” quality) times present value.
Investors appear increasingly attracted to the stocks as five of the six are priced above their 200-day average, implying an upward trend by that measure. All buy-recommended, the six are, in order of increasing McDep Ratio, ConocoPhillips (NYSE:COP), Total S.A (NYSE:TOT), Royal Dutch Shell (RDS), Chevron (NYSE:CVX), BP plc (NYSE:BP) and ExxonMobil (NYSE:XOM).
A challenge of oil and gas investment is to balance the natural volume decline of oil and gas fields with the resulting tendency to a rising commodity price over time. The largest companies are succeeding from a financial point of view in growing overall volume. The share adjustment gives credit for share repurchase done primarily by U.S. companies. The debt adjustment neutralizes the appearance of growth from running up debt which none of the six companies does inordinately. The dividend adjustment, added since the quarterly disclosures, gives credit to the European companies that pay high dividends, currently about 6% a year. Although not all production generates the same cash flow, the trends track the same factors, primarily commodity price. Cash flow from refining/marketing, chemicals, power and other businesses, if any, appears close to a cyclical low along with global economic growth.
In oil and gas prices, what comes down goes up again. It looks like it is happening once more. Latest settlement prices for the average of futures for the next six years are $82 a barrel and $6.86 a million btu. Oil is trading above the 40-week average of $70 while natural gas is just under the 40-week average of $6.93.
Originally published on August 4,, 2009.