Three Companies that Could Profit Big from Virgin Oil
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One Texas oilman is betting big on being the first to get residual oil out of virgin oil fields. Eliot Roosevelt Jr., grandson of of FDR, is planning to partner up with Kinder Morgan Energy (NYSE: KMP) and Southern Company. While carbon dioxide recovery, a tertiary process of injecting CO2 into wells and making the oil slippery enough to to recovered by a second well, has been around for 40 years, virgin fields are a new frontier.
Bloomberg's May issue profiles Roosevelt and his plans to conquer the Permian Basin of Texas and New Mexico. The main challenge is getting the CO2, which can be obtained from extinct volcanoes, fertilizer companies, recycled from residual CO2 in the wells themselves, and utility companies. CO2 from utilities has the added benefit up cleaning up CO2 emissions, and thus has an environmental side benefit. The United States Geological Service expects a gain of $2.7 billion barrels of oil in the Permian Basin in West Texas and New Mexico alone.The Permian already uses 2 billion cubic feet of CO2 daily to recover residual oil.
While there are a lot of players in the oil patch using or selling CO2 for mature oil properties, like Denbury Resources and Whiting Petroleum, it's Roosevelt's foray into virgin territory that is notable. Kinder Morgan Energy is his key to unlock this largesse with its pipeline expertise.
Kinder Morgan Energy is a master limited partnership and midstream operator. It is also the largest American pipeline company. It currently has a negative EPS of $0.33, but it yields 5.90%. The stock hit a 52 week high of $90.37 on April 2, with the search for yield undoubtedly a factor in its success.
Investors should keep an eye on headlines about Roosevelt's venture as he starts drilling this month. Roosevelt expects Kinder Morgan to work with him either as his CO2 supplier, operator, or investment partner.
Kinder Morgan has a CO2 division which can produce and deliver CO2 through 1500 miles of pipeline, moving over a billion cubic feet of CO2 daily.
As a midstream with longer contracts and a dominant position Kinder Morgan is safer than a driller, and analysts expect 11.75% EPS growth at the company over the next 5 years. However, this may be a lowball estimate if companies can get rolling with CO2 recovery plans.
Other ways to play CO2 enhanced oil recovery
Maybe you aren't interested in an MLP like Kinder Morgan for tax reasons. Occidental Petroleum (NYSE: OXY) is an independent exploration and production oil company that gets over 60% of its oil from CO2 enhanced oil recovery (EOR) and has been using the process for 15 years.
Occcidental trades at a 14.45 P/E and offers a 3.10% yield. It's off from its 52 week high of last May and is down over 10% over the last year. Billionaire investor Steve Cohen believes in the name, making it his 14th largest portfolio position. Legendary oilman T. Boone Pickens also recently added it to his portfolio. What he doesn't know about oil isn't worth knowing.
The company has been beating analyst estimates for its last three earnings reports and has an admirable operating margin of 30.78% and profit margin of 19.02%.
Occidental compares favorably to ExxonMobil with a lower PEG of 1.88 to Exxon's 3.56 and a higher yield than Exxon's 2.60%. That said, Exxon's P/E is only 9.56. Analysts have a price target for Occidental of $99.26 for more than 20% upside. However, Occidental's five year EPS growth prospects at 5.96% are lower than expectations for the industry at 14.60%.
Play the patch with this Dividend Aristocrat
Finally, Air Products & Chemicals (NYSE: APD) already benefits from CO2 use on mature oilfields. It's been in the EOR business for almost 50 years providing nitrogen and recovery equipment.
This global company also supplies atmospheric, process, and specialized gases, services, and equipment for a wide range of industries, including agriculture, energy, health care, transportation, and more.
The company offers a 3.30% yield which it has raised for 31 years for an average increase of 10%. This Dividend Aristocrat trades at a 15.24 P/E with a 1.67 PEG. Air Products may be slightly overvalued here, but has a lower multiple than competitors Airgas and Praxair.
Air Products is reporting again on April 23, and is off its 52 week high from last April of $90.51. Analysts give it a price target of $94.57 and an 8.83% five year EPS growth rate. Its price to book is 2.81, not a bad showing, and its return on equity is 16.70%.
The EOR market is almost doubling every four years as wells worldwide mature and cost prohibitions and regulatory challenges fall away. CO2 is still the preferred tertiary method to seismic, microbial, chemical, and thermal tertiary solutions. The companies with the most expertise in CO2 are going to be the big gainers of market share going forward.
Boosting the yield
All three companies are doing their best to maximize yield from wells, both virgin and mature. Investors may care more about their dividend yield, however. Air Products has the longest history of increases, but Occidental has the highest yield percentage of raises.
Kinder Morgan is an MLP and charged to return a certain percentage of profits to shareholders rather than declaring a fixed monetary amount. Its yield can be volatile, as displayed on the chart. In general, its rate of return will be higher than individual energy stocks.
There will be oil
There will be headlines on Roosevelt's success with this promising new venture, which according to the Bloomberg article has a 90% chance of pulling in over 400 million barrels. As a result CO2 will likely gain more support and publicity, creating a win-win-win situation: drillers win, the environment wins, and investors win.
Before you invest, drill down some more on this tried and true CO2 process and then pick depending on what your portfolio needs: dependable yield like Air Products, good fundamentals and yield from Occidental, or high yield for a more long term, low turnover portfolio from Kinder Morgan.
AnnaLisa Kraft 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!