Is Management Bullish on These Oil & Gas Companies' Future

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Recently, the Summit Ski Conference was conducted, where different energy companies shared their future prospects with investors. The conference was certainly an eye opener and gave a clear view of whether managements are bullish on the future of their companies or not. I have pulled out two integrated oil & gas players that presented their cases in the conference. Let’s see whether the managements are bullish or not.

ConocoPhillips (NYSE: COP)

After some 2013 volume confusion, ConocoPhillips is in the penalty box. It is interesting to note that the targets are modest and attainable. However, the market seems to doubt the company’s ability to reach there, given that it has 2Q/3Q maintenance and weak Canadian differences to work through. The management believes that the volumes will bounce back in 4Q. Following are some of the key takeaways:

-  2014 is a strong volume year given project startups. The company is confident in 1.8 mbd (million barrels per day) by 2016 with higher margins. This is based on sanctioned projects and shale.

-  For simplicity, it is worth noting a 6%-10% cash flow growth from ‘13 to ’17 will get the company cash flow of $18-20 billion, which is above the Street estimates.

-  Most of the company’s 22 million shale acres is held by production (HBP). So there is limited need to destroy capital by chasing growth.

-  Shale e.g. 7,000 locations in Permian, good well results in Niobrara and Canol will provide growth options beyond 2016.

-  As investment slows in Australia Pacific LNG, Europe and Malaysia, a greater share can go into shales, which can extend the growth beyond FY’16. This will also buy time for exploration in pre-salt Angola/lower tertiary/global shale. The company has now booked their own rig for deepwater. The management views Pre-salt Angola/Bangladesh gas seismic as good areas of exploration. Also, more upside awaits the company in Malaysia.

Talking holistically, the management seems to carry a positive sentiment for the company, and 2014 seems to be an exceptional year that will bring both top and bottom-line growth.

Holly Frontier Corp. (NYSE: HFC)

Dave Lamp, the Chief Operating officer of the company presented in the conference. Investors took deep interest in the presentation given that it was more like an earnings preview as the company sets the stage to release its 4Q earnings in a fortnight. Following were the key takeaways:

Projects:  Dave highlighted that the company is in the final stages of approval for the Woods Cross Phase 1 project (cost is $225 million and expected annual EBITDA is $125 million). The project is expected to be online in 2014. The Phase 2 project is dependent on securing volume commitments given that the project will rely on black wax supply (the cost of the project is $400-500 million and expected annual EBITDA is >$200 million.

The project will be online in 2016. Currently, only about 55 KBD (thousand barrels per day) of black wax production is being carried out in Uinta. However, the reserve potential out of Uinta operations is about 1 billion boe (barrel of oil equivalent). HFC also noted that there were new E&P entrants as well so the supply out of the Uinta is expected to grow in near future. If there is more supply available, then further expansions could be possible.

-  Tulsa expansion: HFC is still waiting for permit approvals to run the Tulsa facilities at 160 KBD vs the 125 KBD today. This would also require some capital investments.

-  Since five of the company’s facilities are situated very close to the shale plays like the Uinta, Niobrara and Permian, the company is looking into doing small logistics projects that will address items such as crude gathering. Dave also mentioned that the LPG market was quite attractive and there could possibly be investments made in this segment. This type of project has the potential to be dropped down into an MLP structure (HFC already owns 44 % of the pure play MLP known as Holly Energy Partners).

Valuations Highlights

-  M&A: Valuations are too rich for the assets they have seen. Their targeted assets on average are 2x of their cost of capital and meet rates of return between 23-30%.

-  Cash:  Once the company completes the projects highlighted above, it really has no big capital commitments at the moment. HFC currently has $2.3 billion of cash on hand and wants to keep at least $1 billion on the balance sheet at all times. The company wants to continue to grow the dividend, and it feels like the company will also have sufficient cash on hand to continue paying out specials. It also has $500 million left on their $700 million buyback program.

Holistically speaking, the management seems to carry a positive sentiment for the company’s future. I have a special liking for the stock given that it is one of the cheapest in this space. One of its peers, Baker Hughes (NYSE: BHI) is trading at a forward P/E multiple of 11x and a forward EV/EBITDA multiple of 5x. This company has a broad international presence. In fact, political conditions in South America, Africa and Russia are a big source of risk to the company’s valuations and estimates. However, HFC is trading at a cheap multiple of 8x only. Also, it’s trading at an EV/EBITDA multiple of 3.6x, which is well below most of its peers, including Baker Hughes.

Foolish Bottom Line

Both of these companies are set to grow on the basis of their expansion plans and solid valuations. 


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