Chevron And Halliburton Upside 100%, Freeport 170%

Includes: BP, COP, CVX, FCX, HAL, SLB, XOM
by: Global Value Investor

The following three companies in the resource sector are cheap. Very cheap. They are set to be at the core of accelerating wealth creation in the emerging markets and around the world. Global growth is not possible without energy and industrial metals such as palladium or copper. Companies operating at the very beginning of the value chain and providing these inputs to the construction industry should do reasonably well going forward. Key drivers for the resource industry are worldwide population growth, technology and activity in the construction industry. The world is more wealthy than it has ever been. The commodity producers listed below are likely to profit from increased demand for their commodities, oil and copper, as the global economy enters a new stage of growth.

Chevron Corp. (NYSE:CVX) is a US domiciled energy company operating in the oil and gas field. Like ConocoPhillips (NYSE:COP), BP (NYSE:BP) and Exxon Mobil (NYSE:XOM), Chevron is vertically integrated and working all steps of the value chain: From exploration to production and transportation to marketing. Chevron has a market cap of around $200 billion and little net debt of about $10 billion. Chevron is one of the largest companies in the world based on revenues ($254 billion) and earnings ($27 billion) and is ranked a Fortune 500 company.

The stock trades at $102 and has a 52 week trading range of $86.68-112.28. Analysts predict a 2013 EPS of $13.17 implying a forward P/E of only 7.7x which is ridiculously cheap given the quality of CVX's international assets. CVX's operating margin stands at 17% and net profit margin at 11%. Investors can pick up another 3.5% annual as dividend which is backed by sufficient cash flow to keep it going. A multiple of only 7-8 times for one of the premier oil and gas companies in the world is clearly too low. An earnings multiple of 15 is more appropriate over the longer term giving the company an upside of 100%.

Halliburton (NYSE:HAL) is a leading oilfield service company providing exploration and production services to the oil and gas industry on a global scale. With operations in more than 70 countries, HAL is one of the largest service providers to the oil and gas industry worldwide - ahead of No. 2 Schlumberger (NYSE:SLB). This strong international presence and HAL's cooperation in exploration and production with the leading oil and gas companies in the world makes HAL particularly attractive. Over the longer-term the supply and demand picture for natural resources is expected to shift to the favor of commodity producers and their servicers, as worldwide reserves come to an end. Demand from emerging markets is likely to accelerate going forward simply based on population growth. Commodity producing companies will be at the core of this trend, which should ultimately support HAL's stock price.

HAL is trading around its 52 week low based on a weak profitability outlook. HAL trades at around $29 and the 52 week trading range is $27.21 to $57.77. Like the other hugely undervalued global resource companies I have detailed in articles here and here, HAL, in similar fashion, trades at only 7.7x forward earnings which again is too low a multiple for a service company in one of the most profitable industries in the world. For longer-term oriented, contrarian investors this short-term weakness might be a good entry point. The big, fundamental trends are unlikely to be distorted by short-term profitability issues. The community seems to be overly bearish regarding the stock, which is another pro for the contrarian. In addition, Investors also receive a 1.26% dividend yield.

Freeport-McMoRan (NYSE:FCX) is a US domiciled global heavyweight in copper und gold production. FCX has revenues of about $20 billion and earnings of $3.8 billion. Both operating and net profit margins are high at 39% and 25% respectively.

There are exactly four things why I am super bullish about FCX (I am a long-term investor):

1. FCX is a low-cost producer of copper, a high-in-demand commodity needed by developed as well as emerging markets.

2. FCX has very high profitability measures. The return on equity for 2011 stood at 25%, which is extraordinary.

3. FCX is temporarily impacted by falling copper prices and labor disputes in its key market Indonesia. Both certainly have a margin effect, but should prove to be short-term only. Long-term, copper prices should rise as demand growth will accelerate with the growth of emerging market populations and construction activity. I assume, that labor disputes and higher wages are issues the company can accommodate.

4. FCX is cheap. The P/E ratio stands at only 6.5x which is way too low for a global production leader in copper, a prime commodity. At the same time, the company pays a dividend of 3.7%.


CVX and HAL are premier, market-leading companies with global footprints, proven historical profitability and depressed earnings multiples. Given the quality of the exploration and production assets, a multiple of 15 would be more reasonable over the longer-term giving both stocks about 100% upside.

I am generally more bullish about FCX, as the weakness in the underlying core commodity copper is a reason for me to buy FCX, not sell it. The sentiment against FCX is quite high, given plausible reason for mispricing. I would want to buy FCX, and all other stocks, when their prices are down, not when they are up. FCX should prove to be a viable long-term candidate, that lets me enjoy a roughly 4% dividend on the way with all the upside to catch from emerging market growth.

I estimate a 2014 FCX EPS of $5.97. Based on a multiple of 15, the stock could hit $90, which is an upside of 170%, once the market relents from extrapolating lower copper prices and overdramatizing higher wage costs.

Disclosure: I am long FCX.