5 Cheap Oil Stocks

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

Strange charges, slow markets, and fewer rigs have hurt Halliburton (NYSE: HAL), which provides equipment and services to the oil and gas industry.  In measuring the value of the industry, Halliburton is a good metric.   

Plagued by Gum

In Q2, Halliburton took a strange charge.  The company stocked up on guar gum, a product that drillers use during the hydraulic fracturing process.  Then prices plunged, causing Halliburton to take a huge loss.

While Halliburton faced a unique problem, its other difficulties also plagued the entire oil and gas industry.  The number of American rigs is a central number that indicates the strength of the oil-field-service industry.  According to a report by Credit Suisse, the number of rigs has been declining for months, and the number is expected to decline into 2013.

Baker Hughes (NYSE: BHI), Weatherford (NYSE: WFT), and Schlumberger (NYSE: SLB) are also affected by the phenomenon.  When the number of oil rigs falls, service companies must either weather the storm or find alternate ways to replace that revenue. 

Similar to drillers like ExxonMobil (NYSE: XOM), which trades at a very low P/E ratio, the oil services firms have taken a beating.  As a result of the industry slowdown, oil-field-services companies have trailed the S&P 500 by 10%, according to The Wall Street Journal

However, the downtrend presents a buying opportunity for those who believe that the sector will turn up come 2013.  Below are financial analyses of these four service companies and ExxonMobil.  I included ExxonMobil in the discussion to give a comparison of a drilling company.  The services industry is trading at low valuations – and ExxonMobil is, as well.

Stock Prices and Dividend Payouts Relative to the S&P 500

Valuations

Company

Price/Sales

Price/Book

Book Value/Share

Stock Price

Halliburton

1.1

2.05

16.34

 $        32.71

Baker Hughes

0.89

1.11

38.8

 $        42.71

Weatherford

0.65

0.9

13.05

 $        11.51

Schlumberger

2.16

2.76

25.84

 $        70.09

ExxonMobil

0.96

2.56

35.27

 $        89.88

Takeaways

From the chart above, the market looks to be punishing companies with large debt loads (debt loads taken from Yahoo! Finance).  Weatherford, for example, is trading under its book value per share.  At just .9, Benjamin Graham would likely point out that this company is worth more dead than alive.

When Weatherford last reported earnings, the company showed $7.9 billion in debt and just $339 million in cash.  Further, the company posted a poor -$298.4 million in leveraged free cash flow (ttm).

Schlumberger, in contrast, reported $11.2 billion in debt compared to $4.8 billion in cash on hand.  For the capital-intensive oil and gas industry, this is far better – perhaps a reason that Schlumberger trades at almost three times its book value.

Finally, Exxon’s valuations are telling.  Exxon sells at 2.5 times book value, but trades at a P/E of just 9.5.  Exxon competes in an incredibly capital-intensive business.  However, its debt pales in comparison to its cash.  Exxon has $15.6 billion in debt and $17.8 billion in cash, when it last reported its earnings results.

Growth Ahead

While the U.S. market turns down, oil and gas companies can hedge their losses by earning revenues in Africa and Asia.  Writing about Halliburton and the industry overall, The Wall Street Journal says:

While short-term trends have dented Halliburton’s bottom line, the big picture is brighter.  Growth in rig usage abroad, especially in Africa and Asia, should keep the global rig count roughly flat this year and next, predicts Credit Suisse.

In the midst of a U.S. slowdown, Halliburton, Baker Hughes, Weatherford, and Schlumberger can travel overseas to boost their revenues.  Exxon already drills in these regions.

Buying at Nice Valuations

The prices of these large oil and gas companies have lagged the market.  If the S&P continues its recent downtrend, the market will likely take these stocks with it. 

For the astute investor, a market downturn could be a nice time to scoop these already-battered oil and gas plays on the cheap, laying the groundwork for later profits.


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company and ExxonMobil. Motley Fool newsletter services recommend Halliburton Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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