We have selected a few oil and natural gas plays to highlight as investment ideas for investors interested in taking exposure in the Oil and Gas Industry. These stocks have been selected on the basis strength of their business models, profitability going forward, growth prospects, high dividend yields and/or cheap valuations.
We would like to highlight that the stocks mentioned below have a high correlation with oil and natural gas prices.
Chevron Corp (NYSE:CVX) is the second largest integrated Oil and Gas Company in the U.S. with a market cap of more than $215 billion. The company reported EPS of $3.56 for 2Q2012, showing a YoY decline of 7.5%. The decline in EPS was due to lower average crude oil prices and depressed natural gas prices in the U.S.
The 2Q2012 EPS of $3.56 beat mean analyst estimates of $3.24 by 10%, however, revenue estimates of $62.6 billion missed mean analyst estimates of $68.6 billion by 8.7%.
The company intends to invest in the Gulf of Mexico for exploration and production offshore, as well as a fourth discovery in Australia, and is expected to explore locations in West Africa and South America for conventional oil and gas. CVX is following an aggressive approach for exploration and production of unconventional oil and gas in Argentina, Poland, China, Canada, Ukraine and the U.S.
CVX is currently involved in the development of two LNG projects in Australia for the purpose of export, and is expected to become the operator of these projects. The company is expected to benefit from higher refining margins. Also, CVX has the highest cash margins.
CVX is offering a high dividend yield of 3.3% and is trading at P/E and P/B multiples of 8.9x and 1.49x.
For a detailed analysis, please review our report "Hedge Chevron By Selling Oil ETF".
Total SA (NYSE:TOT) is a France-based integrated Oil and Gas Company with a market cap of more than $109 billion; the company is listed in the U.S. as an ADR. TOT reported EPS of $1.62 for 2Q2012, indicating a decrease of 9% compared to 2Q2011's EPS of $1.78. The reported EPS was almost in line with analyst estimates of $1.63. The decrease in earnings was due to lower crude oil prices, exchange rate devaluation of the Euro and decreased production. The company reported higher refining margins, while its chemical segment performed well in Europe.
The company is expected to benefit from the Halfaya and Bangkot South projects, started in Iraq and Thailand, the gas and condensate discovery in the Norwegian North Sea, increased stake in the LNG project in Australia, exploration license acquisition in Bulgaria, Kenya and Uruguay, development of Tempa Rossa in Italy and Yucal Placer in Venezuela, and commercial notice of the Absheron gas discovery in Azerbaijan.
However, TOT, being a France-based company, has a very high exposure to the economic conditions in the European Union, as approximately 67% of revenues is earned from Europe (23% is from France alone).
The stock is offering the highest dividend yield in the integrated oil and gas sector of 6.10% and is trading at cheaper P/E, P/B and P/S multiples of 7.25x, 1.03x and 0.53x.
Exxon Mobil Corp
Exxon Mobil Corp (NYSE:XOM) is the largest integrated Oil and Gas Company in the world, with a market cap of more than $400 billion. The company reported GAAP EPS of $3.41 for 2Q2012, showing an increase of 58% compared to GAAP EPS $2.18 for 2Q2011; this increase was led by gains on asset sales and tax benefit from divestments. The adjusted EPS of $1.8 for 2Q2012 decreased 18% compared to the same period last year, and missed analyst estimates of $1.95 by 7.8%. The decrease in earnings is primarily due to lower average price of crude oil and depressed natural gas prices in 2Q2012, as compared to the previous year's quarter. However, the company reported total revenues of $127.36 billion for 2Q2012, which was 9% higher than markets estimates of $116.41 billion.
Gas prices rebounding in the U.S. and growth measures being taken by the company, including the export of LNG from the U.S, joint exploration with Rosenft in shale reserves in Western Siberia, large discovery offshore East Africa, and any positive developments on the production of shale gas in Germany, will be beneficial for XOM going forward. The company is expected to benefit from higher refining margins as has been witnessed previously.
XOM offers a dividend yield of 2.6%. We have a positive stance on the stock, however, we advise investors to take a position as the stock undergoes correction, since it is trading at premium P/E and P/B multiples of 11.3x and 1.8x compared to its peers, and missed consensus estimates.
For a detailed analysis, please review our reports "Buy Exxon Mobil: High Dividend Yield And Cheap Valuations", and "Exxon To Benefit From Strong Financial Position, Economic Recovery".
Halliburton Co (NYSE:HAL)
HAL is the second largest oil service company in the world with a market cap of $30.74 billion. It is the largest provider of hydraulic fracturing services in North America. The EPS of $0.80 for 2Q2012 remained almost flat compared to EPS of $0.81 witnessed in 2Q2011. The 2Q2012 EPS beat analyst estimates of $0.75 by 7%.
The higher than expected earnings for the quarter are attributed to the increased revenue from the International segment, as the number of rigs witnessed an increase of 3%. The rig count in North America witnessed a decline of 17% due to the annual spring break up in Canada (70% decline) and in the U.S., due to lower natural gas prices.
Natural gas prices have witnessed a rebound after bottoming at $1.84/mmbtu in April; this is a positive signal for HAL, as increased natural gas prices will improve drilling interest for natural gas. There has been an increased shift towards liquid plays due to higher profitability, and this is also expected to continue going forward.
HAL has signed a Strategic Cooperation Agreement with Gazprom International, while it has started production of the new Q10, and it introduced PerStim, which is a substitute for guar gum. Also, new technologies have been announced and introduced by the company; all the aforementioned factors will yield positive results going forward. Also, the demand for energy is ever growing and the search for new oil formations, increased production from existing reserves, and an increase in unconventional production will keep demand for oil services high going forward.
The company is offering a relatively lower dividend yield of 1.1%, however it is trading at a cheaper P/E of 9.58x, and we expect the company to witness growth in the future. Therefore, we have a positive stance on the stock.
For a detailed analysis, please review our report "Buy Halliburton: The Worst Is Priced In", and Why Did Halliburton Post Better Than Expected Results?"
Schlumberger Ltd (NYSE:SLB) is the largest oil services company in the world with a market cap of $94.5 billion. The company reported EPS of $1.05 for 2Q2012, showing an increase of 21% from EPS of $0.87 witnessed in 2Q2011. The earnings beat the mean analyst estimate of $0.998 by 5.2%. The increases in the earnings for the quarter were above the analyst estimates and last year's earnings due to increased exploration for oil in international markets, while revenue decreased in North America because of the season break up in Canada and the U.S. due to depressed natural gas prices.
SLB completed the sale of its Wilson distribution business and divested its stake in CE Franklin, completed its acquisition of the SPT group - a software company specializing in dynamic modeling, announced the acquisition of GEDCO - a provider of geophysical survey design software and services, entered into an agreement with the Casing Drilling division of Tesco, acquired 20% in the Anton Oilfield Services Group, and acquired an ownership stake in Liquid Robotics Oil and Gas Joint Venture.
As mentioned above, the exploration for new oil and gas reserves, increased production from existing reserves, and increased unconventional production in the U.S. due to a reversal in natural gas prices and increased interest in production of tight oil and gas internationally, will increase the demand of the services provided by SLB, and being a market leader, the company is expected to benefit the most.
SLB is offering a low dividend yield of 1.5% and is trading at a premium P/E multiple of 15x. However, we believe there is growth to be witnessed by the company going forward and we maintain a positive stance on the stock.
For a detailed analysis, please review our report "Buy Schlumberger To Benefit From The Upstream Oil And Gas Spending Cycle".
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.