An Impressive Run: Adams Resources & Energy
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Since late 2010, the West Texas Intermediate spot price has broken off with its correlation to the Brent Crude spot price. See below:
Although a WTI marketing and selling company, Adams Resources & Energy (NYSEMKT: AE) fell today, its recent trading has been outperforming the market considerably. Below is the security's three month performance relative to the S&P 500:
Integral to Adams current outperformance has been the spread between WTI and Brent. More specifically, Adams' GulfMark Energy, Inc. subsidiary purchases crude oil and arranges sales and deliveries to refiners and other customers. Crude oil is acquired from independent producers primarily in Texas, Louisiana, and Michigan. Further, the company's Adams Resources Exploration Corporation subsidiary is actively engaged in the exploration and development of domestic oil and gas properties primarily along the Gulf Coast of Texas and Louisiana.
The spread between WTI and Brent has widened Adams' margins to the extent that for the nine months ended 9/30/11, the increase in EPS YoY was 291.21% ($4.31 vs. $1.48). Forward-looking statements from Adams are not so bullish however, the WTI to Brent spread has narrowed from above $20 to about $10.
This change has prompted Adams to forewarn its shareholders in November of 2011 that, "Over the course of the mid-term time horizon (12 months from current date) management anticipates crude oil marketing margins returning to their historical levels."
Elsewhere however, more recent forecasts assert that these statements may have missed the mark. It is the opinion of the author that these forecasts should spur investors that have wide risk-tolerance to direct attention to the security.
First, investors are advised to carefully monitor what should be underwhelming year end results as a result of the narrowed gap between WTI and Crude. Second, investors are advised to consider a depreciation in Adams stock value as a possible entry point. The stock should be considered because forward-looking estimates from third parties hypothesize that the spread between WTI and Brent could widen yet again.
More specifically, Forbes reported on January 3rd that SEB Commodity Research, part of the Swedish bank SEB Merchant Banking, said crude oil prices should remain at elevated levels in 2012, with Brent prices around $114 a barrel. In terms of WTI, TD Securities estimated its prices to average $95 a barrel in 2012.
This hypothesized $19 spread can potentially result in substantial profits for Adams yet again.
At the time of writing WTI sat at $98.85 while Brent traded at $110.10, for a difference of $11.25. Some solid fundamentals for AE are presented below.
|Company||Recent Price||Recent P/E||Recent Book Value||Total Cash (MRQ)||Total Debt (MRQ)||Operating Cash Flow (TTM)||
Return On Assets (TTM)
Return On Equity (TTM)
|Revenue (TTM)||Beta||Market Cap|
|AE||$34.10||7.11 (TTM)||$25.69||53.12 Million||Nil||67.88 Million||5.86%||20.75%||2.95 Billion||0.93||146.33 Million|
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