3 Oil & Gas Firms Liked By The Street

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Includes: APA, HES, WMB
by: Takeover Analyst

We take a look at some oil & gas companies that are currently rated favorably on the Street, receiving a rating of a "buy" or better. They cover a range of industries: pipelines, exploration & production, and integrated oil & gas. Of the three, Apache (NYSE:APA) is the most preferred, due to its attractive growth story and irrationally low multiples. Based on my review of the fundamentals and multiples, I share this sentiment.

Apache

Apache is rated a "strong buy" and trades at a respective 10.6x and 8.9x past and forward earnings, with a dividend yield of 0.6%. It is 30% more volatile than the broader market.

Consensus estimates for Apache's EPS forecast that it will grow by 4.2% to $12.33 in 2012, and then by 13.3% and 19% in the following two years. Assuming a multiple of 11x and a conservative 2013 EPS of $13.74, the rough intrinsic value of the stock is $151.14, implying 38.1% upside. Production has been increasing through horizontal drilling. Gas production is estimates to average a record 67.34 Bcf/d in 2012, a 2% y-o-y improvement.

Hess

Hess (NYSE:HES) is rated near a "strong buy" and trades at a respective 13x and 7.9x past and forward earnings, with a dividend yield of 0.6%. It is 20% more volatile than the broader market.

Consensus estimates for Hess' EPS forecast that it will grow by 12.4% to $6.61 in 2012, and then again grow by 23% in 2013, before declining by 3.7% in 2014. Assuming a multiple of 11x and a conservative 2013 EPS of $8.05, the rough intrinsic value of the stock is $88.55, implying 35.9% upside. Management has increased focus on unconventional play to improve visibility on production and plans to invest $2.5B this year alone. The funding will come mostly from asset sales and internally generated cash flow. At the same time, the company is also hedging 120K barrels of oil per day.

Williams Companies

Williams Companies (NYSE:WMB) is rated a "buy" and trades at a respective 17.1x and 19.5x past and forward earnings, with a dividend yield of 3.6%. It is 30% more volatile than the broader market.

Consensus estimates for Williams' EPS forecast that it will grow by 22.7% to $1.57 in FY2011, decline by 3.2% in FY2012, and then grow by 9.9% in FY2013. Assuming a multiple of 23x and a conservative FY2012 EPS of $1.47, the rough intrinsic value of the stock is $33.81, implying 16.1% upside. The recent decision to carve out the E&P business will catalyze value as greater visibility over earnings follow. The potential acquisition of Southern Union will also unlock synergies, while improving scale.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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