Of the many companies in the oil and gas sector covering a wide spectrum of risk, some will profit in the short term from the latest rise in oil and gas prices, while some will profit in the long term. The companies that focus on refining may suffer in the short term through higher input costs, but will benefit in the long term as demand for the companies' products increase (in line with economic recovery).
In this article, I examine five operators with low payout ratios and reasonable earnings multiples to determine how ideal they are for investment at this time. I chose to focus on the following companies because they are all facing similar headwinds of higher input costs, political risk due to expansion to Libya, Algeria and elsewhere, and stiff competition. Here are my findings:
BP (NYSE:BP) has been range bound between $33 and $50 per share over the past year, and the stock is presently trading in the top quartile of the range and coming out of a trough that brought it to its 52-week low of $33.62 in October of 2011. In addition to this capital appreciation, the company also pays out a dividend of $1.92 per share that brings about a dividend yield of 4% at the stock's current price.
This dividend is paid out on a consistent basis, but has been lowered since the Deepwater Horizon incident. The payout ratio on the stock is 21%, which is lower than the industry average of 31% and similar to the company's nearest competitor Exxon Mobil Corp (XMO)'s payout ratio of 22%. I think this gives the company room to raise dividends as its revenues increase.
Today, BP is one of the top six players in the worldwide market and has operations in over 29 countries, including the Middle East, Algeria, Africa, Mexico, and Russia, and has most recently been expanding its operations in China. As the Deepwater Horizon incident fades into history, the company can get back to business. In my opinion, the China project and the company's BP Alternative project mark the start of this process. I think the alternative fuels project can go a long way into cleaning up the company's reputation.
Occidental Petroleum (NYSE:OXY) has been range bound between $66 and $118 per share over the past year, and the stock is at present trading near the top of this range and coming out of a trough that brought it to its 52-week low of $66.36 in October of 2011.
Over and above the capital appreciation, the company pays out a dividend of $2.16 per share that amounts to a dividend yield of 2.1% at the stock's present price. This dividend is both paid out and raised on a consistent basis. The payout ratio is 23%, which is lower than the industry average of 31%, and lower than the company's nearest competitor Exxon Mobil Corp's payout ratio of 22%. This leaves the company with plenty of room to raise dividends, in my opinion.
Currently, Occidental Petroleum has operations in the United States, the Middle East, and Latin America, and has recently expanded its operations into Libya and Oman. The company is only involved in exploration and production of oil and gas reserves, and is not involved in the refining aspects of the industry. This makes the company more of a pure play on the price rise in the commodities, in my opinion. So as the price of oil and natural gas rise and fall, the company's revenues will rise in direct correlation. I think with the inevitable upswing in the prices of these commodities and the increase in the company's production, a near-term revenue increase is a foregone conclusion.
Sunoco (NYSE:SUN) has been range bound between $27 and $47 per share over the past year and the stock is presently trading in the top quartile of the range. It is also coming off the 52-week low of $27.76 per share it reached in October of 2011.
In addition to the capital appreciation, the company pays out a dividend of $0.80 per share that brings in a dividend yield of 2% at the stock's current price. This dividend is paid out on a consistent basis, but has been reduced from its 2009 levels. The payout ratio on the stock is 31%, which is in line with the industry average of 31%, but much higher than the company's nearest competitor Hess Corporation's (NYSE:HES) payout ratio of 8%. This does not leave the company with much room to raise dividends, in my opinion.
Sunoco is the second largest independent refiner in the United States and also operates over 4,500 gasoline retail stores across the country. The company's end products include jet fuel, heating oil, and diesel fuel, as well as industrial chemicals and coke for the steel industry. The company is, however, spinning off its coke segment into a separate company, SunCoke Energy Inc. (NYSE:SXC), and has sold off its industrial chemicals division. This may make the company more susceptible to fluctuations in the price of its inputs. While I think diversification of the company's end products and the relatively stable pricing structure of these goods offset the volatility of the company's input costs to a degree, the company may still regret the move.
Newfield Exploration Company (NYSE:NFX) has been range bound between $34 and $78 per share over the past year, and the stock is presently treading water at the bottom of this range. Two of the company's competitors in the industry are Cabot Oil & Gas Corporation (NYSE:COG) and Forest Oil Corp. (NYSE:FST).
Cabot Oil & Gas Corporation currently has a five-year expected PEG of 6.01 and Forest Oil currently has a five-year expected PEG of 1.68. In my opinion, and in terms of the company's future growth, Newfield Exploration Company is cheaper with a five year expected PEG of only 0.92.
Newfield Exploration explores for, develops and acquires oil and gas properties, primarily in the United States, but does have smaller operations in Malaysia and China. The company's major holdings are in the Rocky Mountains, Mid-Continent, Appalachia, onshore Texas, and the Gulf of Mexico regions. The company's international operations consist of approximately 936,000 acres in offshore Malaysia and approximately 385,000 acres in offshore China. Although this expansion does represent an opportunity for growth in the company, it also carries with it an added political risk.
In my opinion, the company's plans to concentrate its efforts in the oil segment of its business may work as a short-term cash generator, but if that cash is not used for future growth in diversified holdings, the strategy may backfire on it in the long term.
Precision Drilling (NYSE:PDS) has been range bound between $7 and $18 per share over the past year, and the stock is presently trading at the bottom of this range. Two of the company's competitors in the industry are Helmerich & Payne Inc. (NYSE:HP) and Nabors Industries Ltd. (NYSE:NBR).
Helmerich & Payne has a five-year expected PEG of 0.83, and Nabors Industries has a five-year expected PEG of 0.63. In my opinion, and in terms of the company's future growth, Precision Drilling is cheaper with a five-year expected PEG of only 0.33. Its growth estimates are valid.
Precision Drilling provides drilling and related services to the oil and gas industry in the form of land drilling, directional drilling, turnkey drilling as well as camp and catering services. The company also acts to procure and distribute oilfield supplies in addition to manufacturing and refurbishing drilling and service rig equipment.
The company offers these services in just about every conventional and unconventional oil and natural gas field in Canada and the United States and is expanding its operation into Mexico and Chile. I believe the company will prosper in the near future with all the activity in shale drilling, especially as the major oil companies move into the sector with relatively little experience drilling in these geographic locations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.