Wednesday Integrated Wrap-Up: STO Rises on Earnings; OXY Slips
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Integrated oil stocks underperformed the S&P 500 index +0.15% to +0.22% in Wednesday's session. Industry leaders included HollyFrontier Corp. (NYSE: HFC) and Statoil ASA (NYSE: STO), which reported earnings. These stocks rose 3.98% and 2.70% on volumes of 4.88M and 1.98M, respectively.
For an extended take on why I am projecting that HollyFrontier will outperform the market over the next year or so click here. In short, HollyFrontier has some alluring relative valuations and the key macroeconomic indicator for refining heavy companies, the crack spread, is heading toward more profitable levels.
Wednesday's industry laggards included Occidental Petroleum Corp. (NYSE: OXY) and Murphy Oil Corp. (NYSE: MUR). These securities fell 0.98% and 1.18% on volumes of 3.32M and 1.25M, respectively.
Sector-wide news included oil futures holding steady after U.S. supply data was released; the U.S. federal government pledging to devote science-based initiatives and funding for energy projects in the Arctic; and ExxonMobil announcing that it will go on the exploratory front for shale-based resources in Poland.
Statoil's shares rose today on better than expected profits and reserve-replacement. Statoil posted net profit of 25.48 billion kroner ($4.42 billion), compared with 9.53 billion in the same period of the previous year. Statoil cited higher-than-expected average oil prices throughout the fourth quarter due to heightened demand from emerging markets as a major contributor to its performance.
Overall, Statoil expects production growth of 3% this year and its $4.4B acquistion of Bakken-based Brigham Exploration should help it to reach that projection. In fact, that acquisition along with other assets Statoil purchased in the area previously (from Chesapeake Energy and and SM Energy), made the company one of the top 10 holders of Bakken acreage and led CEO Helge Lund to state that, “[Statoil's] key focus is now on the U.S."
Aside from posting strong profits, Statoil managed an equally strong reserve-replacement ratio of 117%. This was the first time the company found more oil and gas then it produced since 2005. Focusing on these figures, Lund stated that "the replacement ratio would remain above 100 percent, on average, until 2020."
Everything considered, today's news demonstrates that Statoil, unlike many integrated companies that have reported earnings to this point, was able to capitalize on high oil prices and grow its reserves. Statoil shareholders should be pleased and I believe buy-and-hold investors should interpret Wednesday's news and Statoil's relative valuation as a green-light for purchase.
Some key valuations for Statoil, along with two other major integrated peers from Europe, Total S.A. and Eni S.p.A., are presented below:
| Company | Recent Price | Trailing P/E (TTM, Intraday) | EV/EBITDA (TTM) | ROE (TTM) | Profit Margin (TTM) | Levered Free Cash Flow (TTM) | Trailing Annual Dividend Yield |
| Statoil | $26.65 | 7.87 | 2.24 | 26.60% | 10.23% | $17.18B | 4.30% |
| Total | $54.43 | 7.78 | 3.37 | 19.62% | 7.54% | $5.33B | 5.90% |
| Eni | $45.71 | 10.29 | 3.59 | 12.76% | 5.64% | $139.27M | 6.30% |
TTM=Trailing Twelve Months
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Occidental Petroleum's shares slid Wednesday on interesting news concerning tertiary oil start ups. Succinctly stated, tertiary oil start ups occur when oil companies inject carbon dioxide into old wells in the hopes that more oil will be produced. Occidental Petroleum's largest business operation is located in Texas' Permian Basin and about 60% of its wells there utilize tertiary processes.
On Occidental's website there is no mention of the fact that age is a factor in tertiary start ups; it reads: "60 percent of Oxy’s Permian Basin oil production is from fields that actively employ carbon dioxide (CO2) flooding, an enhanced oil recovery (EOR) technique in which CO2 is injected into oil reservoirs, causing the trapped oil to flow more easily and efficiently."
This statement contrasts sharply with Investopedia's definition: "[tertiary start ups are a] process in which carbon dioxide is injected into old oil wells in an effort to stimulate additional production."
These differing definitions should result in an inquisition to the health of Occidental's premier operation. If 60% of its Texas operations are nearing depletion instead of simply having an extra process conducted to "release trapped oil," investors should be concerned.
Overall, I believe buy-and-hold investors should look elsewhere for integrated oil exposure. The uncertainty concerning tertiary start ups, and the company's relatively high fundamental valuations (presented below) do not make a compelling case for it.
| Company | P/E (TTM) | P/S (TTM) | P/B (MRQ) | Sales - 5 Yr. Growth Rate |
Gross Margins (TTM) |
Return on Investment (TTM) | Dividend Yield |
| Occidental Petroleum | 13.50 | 3.78 | 2.33 | 1.94% | 48.39% | 15.00% | 1.80% |
| Industry Average | 12.25 | 1.41 | 1.97 | 5.28% | 31.72% | 14.40% | 3.50% |
MRQ=Most Recent Quarter
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