There's Value Left in Energy, But Don't Wait Too Long to Buy

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

As the market continues to rise, the pure upstream oil and gas businesses must be feeling left out. Many integrated oil companies are a little neglected as well, refiners not so much. Value in the energy sector continues to exist even for the refiners, however, so I'll get that out of the way first.

The world's largest independent refiner still has room to run...

Owning 16 petroleum refineries with a combined throughput capacity of approximately 3 million barrels per day, Valero Energy (NYSE: VLO) is the world's largest independent refiner, and has recently been a favorite in my portfolio for its great performance. The stock still has room to rise as well, as long as domestic oil stays cheap.

The company saw a whopping 20% increase in profit as well as significantly higher gross refining margins-- largely due to its reliance on cheap domestic crude. The company is also looking to find more cheap U.S. crude, and is spending $30 million to create a new crude oil receiving terminal for its refinery in Benicia, located in Northern California. According to a company spokesman:

"Right now, our California refineries have the lowest operating income of our system but the highest operating cost--that needs to change... Crude by rail is a relatively low-cost project that can significantly improve that refinery's competitiveness."

The company is looking to gain another 70,000 barrels a day from its new terminal, which will help cut costs and also improve profits for one of the company's weaker refineries. Valero expects to complete the project by 2014. I see no reason for this company to slow down, especially when there is a glut in cheap U.S. oil that Valero can take advantage of. The company currently trades at only about 12-13 times earnings, carrying a lowly forward P/E of only around 8.5.

The integrated oil and gas giants need some love as well...

Another seemingly cheap company is Chevron (NYSE: CVX). Grabbing this behemoth sooner rather than later would probably be a good idea. The company is diversified in many things other than just oil: such as mining, chemicals, power generation, and most importantly -- natural gas.

Chevron is a leader in liquefied natural gas, and the company is continuing to invest in it. Besides leading the development of the Gorgon and Wheatstone LNG projects located in Australia, the company is also looking to expand its involvement with the country even further by investing in shale assets that cover an area 3 times the size of Hong Kong. Chevron is number two behind Exxon Mobil  (NYSE: XOM), the world's largest international oil and gas company. Exxon is also the largest producer of natural gas in the U.S.

With natural gas getting a thumbs up from both Warren Buffett and Jim Cramer, it seems like now may be a good time to get in the game early. Exxon Mobil and Chevron are both big players in natural gas, and are investing in it to offset the potential fall in oil prices. With both Chevron and Exxon trading at low price to earnings multiples of around 9, they look cheap as well. Chevron also pays a nice dividend, yielding about 3%, while Exxon yields around 2.5%.

These two companies make for great long-term investments, period, and with oil demand expected to rise 5% this year in China -- both companies may benefit from increasing oil demand as well. Both integrated companies, like Valero, are also seeing improved results with their refineries, with Exxon quadrupling its year-over-year downstream earnings last quarter. Chevron also saw increasing profits and higher refining margins last quarter.

Deep value with this pure upstream play...

And then there is ConocoPhillips  (NYSE: COP), which, unlike its fellow integrated competitors at the time, decided that it would be better to separate its downstream and upstream businesses. After spinning its downstream business into Phillips 66, which took away the refining aspect of the business, Conoco is solely a production and exploration company -- the largest in world, in fact, based on oil production and reserves.

Ditching its downstream assets negatively effected earnings in the short-term, and there is now a reduction in safety for the company should oil prices drop significantly, but the company is also diversified with natural gas and is extremely dedicated to shareholders. Conoco currently pays investors an inflation-beating dividend yielding out 4.6%, while being priced at almost 9 times earnings.

Any sign of global economic recovery -- especially in China -- that increases demand for oil, may move the stock. Otherwise, you can sit back and enjoy the yield.

The bottom line

The energy sector still looks attractively valued in a market flirting with all-time highs. The refiners have already had a nice run-up, but should continue to enjoy high margins and increasing profits with the help of cheap domestic crude. The larger integrated oil companies haven't run up as much, and may be a safer play at his point. Chevron and Exxon also pay better than Valero, whose dividend yield is under 2%. ConocoPhillips may pose the most risk, but that 4.6% dividend will pay you to wait for a pick-up in its share price.

The world will be dependent on oil, and increasingly natural gas, well into the future -- and now looks like a good time to jump into this sector; whether it be an upstream, downstream, or integrated company comprising both.

Jharry1 owns shares of ConocoPhillips and Valero Energy. 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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