Wednesday Is a Big Day for Oil Earnings

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

During earnings season, it is pretty common to notice a group of similar companies reporting earnings on or around the same date. Today I would like to focus on a group of one of my favorite kinds of investments: oil companies. On Wednesday three large oil companies report their earnings: Hess (NYSE: HES), Murphy Oil (NYSE: MUR), and Phillips 66 (NYSE: PSX). Let’s take a quick look at each of these, and we’ll decide which looks like the best value ahead of earnings, as well as what we should be paying extra attention to during the earnings calls.

Hess

Hess derives the majority of its revenues from its marketing and refining activities, but most of the company’s profits come from the exploration & production segment. Unlike a lot of similar oil companies, Hess is mainly a U.S. company, with 82% of its revenues coming domestically. 

As far as valuation goes, Hess trades for 11.6 times this year’s expected earnings of $6.31 per share. What stands out to me the most about Hess’ projected future performance is not the numbers themselves, but the uncertainty amongst analysts covering the company. For example, 2014 earnings estimates range from a low of $2.02 to a high of $8.15, an enormous variance. The company also pays a very low dividend yield of about 0.55%, which it has not raised in over a decade.

There are a few things to keep an eye on during Wednesday’s earnings report, aside from the numbers themselves. Pay attention to anything the company has to say about its efforts to de-risk its portfolio by asset sales, and any cost saving projections related to the company’s current production growth projects. As mentioned, the company’s earnings beyond this year are extremely uncertain, so any clarity (as long as it is of a positive nature) would be very well-received by the market.

Murphy Oil

Murphy has a similar revenue makeup to Hess, with most revenues coming from refining and marketing and most income coming from exploration and production. The company plans to spin off its retail gasoline business later this year into a new company called Murphy USA, which operates almost 1,200 service stations, primarily located at Wal-Mart supercenters.

Murphy looks a bit more expensive than Hess, trading for 12.2 times this year’s earnings, with a similar degree of uncertainty in regards to forward earnings. The company does may a much better dividend yield of about 1.9%, which has been raised every year. Also worth noting, Murphy has a more attractive balance sheet, which has under $1.2 billion in net debt (debt minus cash) as compared with about $6.7 billion for Hess. This more than justifies the slightly higher P/E, and is making Murphy seem like a slightly better value so far.

During the earnings call, I’m keeping my eye on any news related to the spinoff, as well as any clarity as to where the company sees its earnings next year. If all is going according to plan, this may not be a bad play to get into pre-spinoff.

Phillips 66

Phillips 66 was spun off from ConocoPhillips last year, and represents the company’s former refining and marketing business. The company operates 11 refineries throughout the U.S. and markets its products through about 8,500 service stations in 49 states. 

Analysts seem to be less bullish on refining/marketing than they are on exploration and production, and as Phillips 66 is only a refining/marketing play, this is definitely reflected in the company’s valuation. Shares currently trade for just 8.4 times this year’s earnings, but realize that earnings are projected to be flat in the coming years. Phillips 66 also pays the best dividend of the group, currently yielding 2.12%. 

Final thoughts

These are three very different plays within the same sector, and the one that’s right for you depends on several factors including your particular risk tolerance, time frame, etc. Currently, I prefer Murphy Oil out of the three for a few reasons. First, I want some exposure to exploration & production (sorry Phillips 66!), and getting into Murphy pre-spinoff will let me do that and will eventually keep both businesses in my portfolio as separate investments. So, if one of the two businesses produces big gains, I could sell that area of the business while keeping my exposure to the other. That is a big “what if,” but I feel that Murphy offers a great combination of stability and flexibility, and that’s what I like to see in long-term investment prospects.

Of course, one of the best things about earnings season is that the fundamental reasons for choosing one over the other can change overnight.  Stay tuned Wednesday to see if any of these three surprises the market and change your opinion.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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