An Upstream Alternative to Chevron and Exxon

By Maxwell Kirchhoff - January 20, 2012 | Tickers: CVX, XOM, NXY | 0 Comments

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With analysts maintaining that global energy use should rise by 45% by 2035, investors are urged to increase their energy sector holdings.  Currently, well-known and established major U.S. integrated oil companies such as Chevron (NYSE: CVX), and ExxonMobil (NYSE: XOM) are trading at just 7.92 and 10.56 times earnings, respectively, and those valuations have many investors optimistic about stock price appreciation.  However, low betas of 0.94 and 0.62 (respectively), and drab 5 year expected PEG ratios from Capital IQ of 1.08 and 1.19 (respectively) might not spur value-oriented buy-and-hold investors looking for market beating growth to purchase shares of these major integrated companies at this time.

An alternative consideration, the upstream oil and gas company Nexen (NYSE: NXY), offers much more alluring metrics for value-oriented buy-and-hold investors looking to beat the market.  A brief fundamental analysis and commentary are offered below. 

Fundamentals

The above illustrates that although the P/E for Nexen is slightly higher than Chevron and Exxon, its PEG and beta make a compelling case for future market beating growth.  The price to book ratio is under legendary value investor Benjamin Graham's ceiling of 1.5, and the company is not facing any debt due now.  More comprehensively, Nexen's total current assets of 3.58 billion (MRQ), and total current liabilities of 3.05 billion (MRQ) demonstrate that its balance sheets are in good order.  Lastly, Nexen's 52-week stock price performance has seen shares plummet -28.67% so this could mark a decent entry point.  

Investors looking to purchase shares of Chevron and Exxon should consider that Chevron is up 14.02% over the past 52-weeks and is just coming off all time highs, while Exxon is up 10.19% over the past 52 weeks.  Thus, value investors may want to wait for a significant pullback before purchasing shares of either company.  Because Nexen's shares have lost so much value over past 52 weeks, I believe their purchase warrants extra consideration.  With this in mind however, one might hold the opinion that Nexen is appropriately valued because markets are purportedly efficient.  On the contrary, I hold the opinion that Nexen is undervalued based on projected increased production throughout 2012.

Looking Forward

Nexen explores for and produces oil and gas in Canada, the Gulf of Mexico, the North Sea, Yemen, Colombia, and offshore West Africa.  This wide region of operation has its benefits and drawbacks, but recently projections are maintaining that production gains of 65,000 barrels of oil equivalent per day by late 2012 are in store for Nexen.  The increased production should stem from the company's Usan holding off the coast of Nigeria, shale gas from British Colombia, and the Buzzard field in the North Sea.  

To add to increased production, Nexen's oil sands fields are attracting suitors.  China's state-owned National Offshore Oil Corp. recently bought 35% of the Long Lake oil sands field and Nexen owns the remaining 65%.  The purchased area was not owned by Nexen but it demonstrates that the projected underproduction of the field was probably accurate, and now rumors are swirling that a bid will be made on Nexen's share.  

Everything considered, Nexen's fundamentals make a compelling case for value-oriented investors and its forward-looking model should be welcomed by those with a long-term investment horizon. 

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