5 Ideas In The Energy Sector

|
Includes: APC, KMI, VLO, WMB, XOM
by: Bram de Haas

Summary

The S&P 500 is trading at its second-highest Shiller P/E ratio.

Energy is the sector that's least overvalued within the index.

Here are five energy investment ideas that look attractive within that sector.

Energy is the most attractive sector within the S&P 500 by Shiller P/E ratios (see table below). I looked at the companies within the sector and compared them using a host of fundamental data. Based on that examination, I present to you a shortlist of five energy investments that look fairly compelling to me, even within an index I deem overvalued.

To get a little bit more granular, I pulled up data on all of the energy companies within the S&P 500. The table below shows a selection of fundamental data I used to narrow down the prospects to research further. Which companies look attractive to you?

Symbol

Market Cap (Current M)

Dividend Yield %

Insider Ownership

Short Percentage of Float

EV-to-EBITDA

Price-to-Tangible-Book

Price-to-Operating-Cash-Flow

10-Year Book Growth Rate

ANDV

$16,278.54

2.16

11.13

4.29

13.96

4.09

8.94

9.3

APA

$17,416.31

2.19

0.6

6.52

10.85

2.52

6.57

-4.5

APC

$27,670.49

0.41

0.44

2.19

12.8

4.74

6.91

-2

COG

$12,380.93

0.52

1.73

4.38

36.44

4.69

16.21

6.9

COP

$61,224.72

2.08

0.24

2.72

23.52

2.02

9.99

-4.3

CVX

$222,530.17

3.68

0.05

1.54

10.57

1.57

12.25

10.4

CXO

$20,123.73

0

1.71

5.15

9.64

2.31

13.23

19.5

DVN

$19,233.85

0.66

0.7

1.76

6.85

14.04

6.57

-7.6

EOG

$56,116.41

0.69

0.88

1.74

18.41

4.04

15.65

8

HAL

$39,683.74

1.58

0.5

2.85

24.69

6.07

16.07

8.6

HES

$14,712.98

2.16

1.51

11.26

64.3

1.1

12.39

9.2

KMI

$42,654.64

2.62

12.64

1.87

13.3

4.36

9.24

0

NBL

$13,769.23

1.41

1.67

5.57

-42.29

1.65

6.94

7

NOV

$13,434.36

0.57

0.48

9.51

-10.36

3.06

27.21

10.2

OKE

$21,219.66

4.64

1.4

7.29

16.79

4.81

8.14

-18.8

OXY

$49,016.78

4.76

1.74

1.23

11.55

2.33

12.05

3.1

PSX

$47,253.37

2.88

0.07

1.87

13.67

2.6

16.86

0

PXD

$25,734.06

0.05

1.18

2.75

15.11

2.49

14.09

10.2

SLB

$95,975.22

2.89

1.32

1.61

21.69

19.9

19.6

12.5

VLO

$34,030.21

3.5

1.01

4.27

7.75

1.73

7.49

4.1

WMB

$24,840.86

3.66

0.43

1.84

13.14

0

6.75

-5.5

XOM

$345,874.95

3.72

0.61

0.9

10.72

1.93

12.34

8.6

I didn't just use the data in the table, as I also reviewed short ratios, for example. Cramming everything into the table would make it look ugly, so that's why I left it off.

The five companies that appear most attractive to me are Valero Energy (VLO), Exxon Mobil (XOM), Kinder Morgan (KMI), Williams Companies (WMB), and Anadarko Petroleum (APC). Operating cash flow played an important part selecting these names, but insider ownership and other valuation metrics also played a part in my decisions. Midstream activities appear to be over-represented, although Anadarko and Exxon have significant upstream activities.

In no particular order, here are the most attractive things about these five companies:

1. Kinder Morgan

I reviewed Kinder Morgan not long ago and found it highly attractive:

Finally, the company trades at the historically lower end of its EV/EBITDA range. If it traded at a more normalized multiple around 2018 at 15x, while EBITDA increased to $8 billion and 5% of the shares were taken out, it could easily result in a share price of $57.

Selling points:

  • 9x operating cash flow
  • 12.64% insider ownership
  • Growth ahead while operating at a low tax rate

2. Exxon Mobil

Just a year ago, I criticized Exxon Mobil several times and said that Royal Dutch Shell (RDS.A) (RDS.B) would be a superior selection. Over the last year, the market gradually reached the same conclusion.

Chart RDS.A Total Return Price data by YCharts

It still seems like a fair position. Although I like Exxon when reviewing energy companies within the S&P 500, its conservative debt profile and the fact that it looks attractive compared to the rest of the index doesn't mean it's superior to a universe of global energy players. Also, Royal Dutch Shell underwent a fairly impressive transformation.

Selling points:

  • 12x operating cash flow
  • 8% 10-year average book value growth (impressive feat in this environment)
  • conservative debt profile

3. Valero Energy

Valero is a major refinery operation, and it's available for cheap. That's really most of the story as most valuation metrics are just screaming "this is cheap."

Selling points:

  • 7.5x operating cash flow
  • 1% insider ownership
  • 1.73x book value
  • 7x EV/EBITDA

4. Williams Companies

Williams (NYSE:WMB) is the general partner of a midstream operation. It has a controlling interest in Williams Partners L.P. (NYSE:WPZ), which isn't in the S&P, although I like it better. Williams is aiming to be the premier supplier of natural gas exporters like Cheniere Energy (LNG). Some would say it's a bet on global demand for cleaner fuel.

Selling points:

  • 6.75x operating cash flow
  • fewer analysts follow it compared to most peers
  • safer midstream business

5. Anadarko Petroleum

Anadarko has a market cap of about $27 billion, to put its buyback program into the right perspective. It is one of the few real E&P companies that immediately looked attractive. It has significant operating cash flow and not a lot of debt.

Selling points:

  • just announced a $2.5 billion share buyback program
  • 6.91x operating cash flow
  • net debt less than 1.5 turn EBITDA

Conclusion

If you need to invest in the S&P 500, it's probably a good idea to look at energy and defensive investments. By drilling down, it's definitely possible to make even better selections as there are valuation discrepancies, and some businesses look much better to me than others. By looking at energy on a global basis, or even outside the S&P 500, there is room for further improvement.

What's your best idea in energy?

Disclosure: I am/we are long WPZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.