2 Winning Picks in Oil & Gas

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When it comes to commodity companies, I try to be very picky. These companies are price takers, and unlike so many firms that peddle differentiated products, they are often subject to the whims of commodity markets. Worse yet, many of these companies spend heavily on new refineries or new oil field prospects.

Fortunately, investors have many attractively-priced stocks to choose from. Phillips 66 (NYSE: PSX) and Chevron (NYSE: CVX) are particularly attractive based on price multiples.

Investment Projects

ConocoPhillips (NYSE: COP) expects to utilize cash, asset and debt sales to fund its spending and dividends while waiting for production to increase. From 2013 to 2017, the company is expected to spend about $16 billion a year. The company spent over $3 billion during the last year over its dividend and it is planning to increase dividends. The company’s spending may outstrip its cash flow. In 2012, COP ended its year with a total cash of $4.4 billion. The company is expected to generate $9.6 billion from the sale of assets.

Management intends to exploit balance sheet strength to fund its growth program. According to Jeff Sheets, the CFO of the company, “We got cash from operations, we got asset sales proceeds, we got cash on the balance sheet already, and we got debt capacity. So there really shouldn’t be any doubt that through a series of price environments that we can fund the capital and fund the dividend.” He also said that assets would be a part of the continuing operations and will generate approximately $15 billion in cash flow. The company’s investment would generate $6 billion to $7 billion of cash flow in future. By 2017, the cash flow would be about $22 billion if energy prices are similar to the previous year.

ConocoPhillips is looking for annual production and margin growth of 3-5% in next few years. In 2017, the company’s output may increase up to 1.9 million barrels of oil equivalent a day as compared to 1.5 million barrels a day from continuing operations during the previous year. Post the spinoff of the refining, pipeline and chemical business to form a separate company, Phillips 66, the company became an independent producer. According to Ryan Lance, the Chairman and CEO of the company, “We have a compelling dividend, and the growth in production and margin is coming and we’re focused on returns.” The company is focusing on reducing its stake in the Australia Pacific liquefied natural gas project and in Canadian oil-sands holdings as they increased their cost estimates by 7% in AUD.

The company, which was planning to sell its stake in Canada’s oil sands, said that it is more difficult for certain buyers as Ottawa has restricted foreign investment in Canada’s resources. The changes were introduced after the contentious takeovers of Nexen and Progress Energy Resources, energy producers in Canada, by Chinese and Malaysian state-owned companies.

The Houston-based oil manufacturer is making special efforts to find the right partner based on the complexity and size of ConocoPhillips' oil sands projects in Western Canada. The country’s new rules have changed the background for investment. Certain types of decisions and deals in the country have a more difficult time due to an investment decision that progressed as they came through the Progress deal with Petronas and through the CNOOC deal with Nexen.

The company has a 50% interest in various oil-sands projects across Alberta. These projects include Surmont, Foster Creek and Christina Lake. According to Lance, planned sale of the oil sands stake is part of the company’s strategy to decrease exposure to high cost projects to create idle funds for shale development. The company is spending a huge sum of funds to increase crude oil output from basins that are of low-cost across North America and the rest of the world. The company has also promised that its cash flow, dividend, margins and production will increase over five years, which is assisted by the high output of crude from places such as the Eagle Ford formation in South Texas.

Of course, there are expenditures in energy projects outside of North America. Chevron and Genel Energy are looking for new oil fields across Morocco. According to Citigroup, the oil companies are planning approximately 10 wells in Moroccan waters through 2014. This represents the quickest pace at which wells would be established since 2000, and it is twice what has been drilled in the past. Cairn Energy has planned to start drilling the Foum Draa prospect during the fourth quarter. According to Laura Loppacher, an analyst at Jefferies Group, “Morocco has seen a huge explosion of interest in the last six months. It’s an area with several plays for people to target, but it’s still frontier and risky.”


The good news is that many oil and gas companies are trading at low valuations:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/B</span></strong></p> </td> <td> <p><strong><span>P/FCF</span></strong></p> </td> <td> <p><strong><span>D/E</span></strong></p> </td> </tr> <tr> <td> <p><span>PSX</span></p> </td> <td> <p><span>Phillips 66</span></p> </td> <td> <p><span>10.14</span></p> </td> <td> <p><span>0.22</span></p> </td> <td> <p><span>1.97</span></p> </td> <td> <p><span>16.88</span></p> </td> <td> <p><span>0</span></p> </td> </tr> <tr> <td> <p><span>XOM</span></p> </td> <td> <p><strong>Exxon</strong></p> </td> <td> <p><span>9.18</span></p> </td> <td> <p><span>0.83</span></p> </td> <td> <p><span>2.43</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0</span></p> </td> </tr> <tr> <td> <p><span>CVX</span></p> </td> <td> <p><span>Chevron</span></p> </td> <td> <p><span>8.82</span></p> </td> <td> <p><span>0.94</span></p> </td> <td> <p><span>1.68</span></p> </td> <td> <p><span>221.6</span></p> </td> <td> <p><span>0.09</span></p> </td> </tr> <tr> <td> <p><span>COP</span></p> </td> <td> <p><span>ConocoPhillips</span></p> </td> <td> <p><span>9.75</span></p> </td> <td> <p><span>1.13</span></p> </td> <td> <p><span>1.47</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.45</span></p> </td> </tr> <tr> <td> <p><span>NXY</span></p> </td> <td> <p><span>Nexen</span></p> </td> <td> <p><span>39.16</span></p> </td> <td> <p><span>2.21</span></p> </td> <td> <p><span>1.65</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.48</span></p> </td> </tr> <tr> <td> <p><span>CEO</span></p> </td> <td> <p><span>CNOOC</span></p> </td> <td> <p><span>8.41</span></p> </td> <td> <p><span>2.24</span></p> </td> <td> <p><span>1.85</span></p> </td> <td> <p><span>5.16</span></p> </td> <td> <p><span>0.19</span></p> </td> </tr> </tbody> </table>

Phillips 66 is particularly cheap on a price-to-sales basis. It is also cash flow positive. Similarly, Chevron is attractive based on its low price-to-sales multiple and is also cash flow positive. Both firms have solid balance sheets.


Value investors should make some time to look at large energy companies in today’s markets because they are trading at attractive price multiples. Phillips 66 and Chevron should top their lists for further research.

BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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