Wrap-Up: The Integrated Oil Playing Field

By Maxwell Kirchhoff - February 9, 2012 | Tickers: SNP, HES, SUN | 0 Comments

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Integrated oil stocks underperformed the S&P 500 index -0.09% to +0.15% today.  Industry leaders included Hess Corp. (NYSE: HES) and Husky Energy Inc, both of which reported earnings.  These stocks rose 4.61% and 1.78% on volumes of 4.11M and 3.13K, respectively.  Industry laggards included China Petroleum & Chemical Corp. (NYSE: SNP) and Sunoco Inc. (NYSE: SUN).  These securities fell 1.82% and 0.72% on volumes of 144.34K and 2.68M, respectively.

Sector-wide news included crude oil rising a third straight day on the Greek austerity agreement and potential for increasing demand; the U.S. urging Bulgaria to reduce its dependence on Russian energy (more on Russia below); and French oil giant Total S.A.'s preparation to move into Iraqi Kurdistan.

Husky Energy Inc. reported adjusted earnings of C$408M or C$0.50 a share today missing the C$0.55 consensus estimate from Thompson Reuters for a negative earnings surprise of 9.09%.  In spite of today's earnings miss, Husky Energy's shares rose due to the company's YoY production growth of 9%, impressive 170% reserve-replacement ratio, and doubled 4Q cash flow of C$1.2B.  

Husky itself was less optimistic than today's traders.  The company lowered its 2012 production estimates to 290,000 to 315,000 barrels per day from 318,900 barrels per day in 2011.  Further, Husky's CEO Asim Ghosh warned of volatile oil prices and intensive capital expenditures in Canada's oil sands over the coming years.  This news could see Husky shares underperforming the market over the next year or so, but new projects in Liwan, and the company's investment in the Sunrise Energy Project should begin to help Husky's bottom line by 2013. 

Everything considered, Husky Energy is a speculative play right now.  Its lowered expectations for 2012 should turn away several investors, but its future-plans at home (Canada) and abroad could pay-off tremendously for buy-and-hold investors.  Only the risk-tolerant need apply however.  

Finally, the company's relative valuations are slightly alluring at this juncture.  Below are some fundamental metrics compared to industry averages:

Shares of Sunoco Inc. fell in today's session without any major news or press releases.  Currently, the Philadelphia based company is divesting its refining operations.  Yesterday S&P took the company off its negative watch-list.

Sunoco shares have soared the past 6 months, rising nearly 30%:

Sadly however, the recent performance of Sunoco's shares is largely attributable to the company's undergoing buy-back.  On Feb. 7th Sunoco stated it would attempt to buy-back as much as 19.9% of its own shares.  While share buybacks often result in increased returns for investors, (and the above short-run performance substantiates this further) Sunoco's latest move appears more out of desperation than anything else.  

Currently the company is in disarray.  Its CEO recently stepped down and it recently spun-off its profitable metallurgical coke producing operations.  The share buy-back and recent dividend hike announcement demonstrate that Sunoco is doing everything in its capacity to woo investors instead of focusing on improving its existing business performance.  I believe that instead of offering investor incentives, Sunoco should let its balance sheets and earnings performance do the wooing.  However, earnings are not Sunoco's strong suit.

Overall, Sunoco has missed earnings estimates 6 of the last 11 quarters with an average negative earnings surprise of 370.31%.  Further, the Motley Fool's CAPS community has rated Sunoco a three-star company.  Unfamiliar with CAPS?  Head to http://caps.fool.com/ and see what it is all about.  

All told, buy-and-hold investors should not need to hear much more than poor historic earnings performances and mediocre CAPS enthusiasm to know that they should look elsewhere for exposure in an industry with much brighter prospects in other companies.

In other news today, an interesting report came out about Russia's abundant energy resources and growing revenues.  Currently, Russia is the largest exporter of natural gas and second-largest exporter of oil in the world.  Its proximity to China puts it on the fast track to supply the nation with its ever increasing energy demands, and it already provides Europe with 25% of its energy needs.  

Overall, more than 20% of Russian GDP stems from the oil and gas industries and the U.S. Energy Information Administration predicts that every $1 rise in the price of crude oil ultimately boosts the Russian government's tax receipts by 0.35% of GDP.  

Aaron Levitt, the author of the article that released these numbers put it most concisely, "as oil prices continue to rise above $100 per barrel, the Russian economy should benefit in spades."

Investors looking to capitalize on Russia's energy reserves should direct their attention to two securities: Lukoil Co. and Gazprom.  Below is a comparison of these securities.

TTM=Trailing Twelve Months; MRQ=Most Recent Quarter

As can be gleaned from the above, the valuations of these securities are quite compelling.  Investors should exercise caution however, these securities are not listed at a major exchange, and as a result, are very thinly traded (Gazprom's volume was 847 today).  However, risk-tolerant investors buying these shares today could be handsomely rewarded if these companies make the decision to trade on the NYSE or NASDAQ.  

Everything considered, Russia looks to benefit from Asian and global demand for energy, Lukoil and Gazprom have substantial reserves (Lukoil: 13.32B barrels, Gazprom: 717.4B cubic meters of oil), both companies have strong cash flows to fund future exploration, and their laudable ROE's are demonstrative of excellent management.  

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