These Energy Companies Are Must Buys
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Higher energy prices due to inflation simply means there has been a reduction in the purchasing power of the dollar (The dollar is the single trading currency for the world’s energy market). Dollar depreciation will force the global oil exporters to demand higher prices. Consequently, it will put more pressure on domestic oil production. According to the Energy Information Administration (EIA), US home oil production reached a 20 year high in 2012 and it is expected to further grow by ~14% in 2013.
In this article, I have selected three companies which are involved in oil & gas exploration and should benefit from the above scenario. Speaking of their business model, these companies provide an interesting investing opportunity due to constant growth in their exploration activities.
BP (NYSE: BP)
Since 2003, BP along with TNK has been actively involved in the emerging market of Russia. Last year, BP announced to sell its 50% interest in TNK-BP to the Russian based company Rosneft. BP will get around $12.5 billion in cash along with a 18.5% share in Rosneft taking its total stake to ~20%. Earlier the transaction was expected to be completed by the 1H13, however Rosneft now plans to take charge by April, 2013. With the help of this deal BP will get two seats on Rosnetf's board, thereby; keeping its operations alive in Russia. Via this deal, both companies will consequently increase their production and reserves in the long run and will share the revenue.
New pipeline of projects
With its huge capital inflow, BP will initiate four new projects in this financial year including North Ranking 2 in Australia, Na Kira 3 in Mexico, Angola LNG and Chirag oil project in Azerbaijan. BP has already started six projects during the fiscal year 2012 and may initiate six new projects in the coming year. Further, BP has also announced its joint venture with the India based company, Reliance, in order to develop a gas field in India. Under this BP and Reliance will together invest ~$5 billion for the next three-five years aiming to enhance gas production in India's east coast. BP, along with Reliance, will take the advantage of the ever growing demand in India improving the earnings of the companies in the long run.
Looking at the future pipeline, I am confident about the company's cash flow in the future. The recent downfall of BP’s stock creates a good opportunity for the investors to take a position. I recommend a buy on BP considering the long-term growth prospects.
Chevron (NYSE: CVX)
Chevron reported its 4Q12 results with good growth in its mbpd (million barrels per day) production for the fiscal year 2012. The company reported around 2.67 mbpd output as compared to 2.64 mbpd during last quarter of 2011. Quarterly earnings were up by ~41% y/y at $7.2 billion. The main contributors in this growth were its underlying projects around the globe including Nigeria, the US, and other countries.
Investments to pay-off
Chevron Limited Canada, a subsidiary of Chevron, has announced its partnership agreement with Apache Canada Ltd, a business unit of Apache. Chevron will acquire 50% in the Kitimat Liquefied Natural Gas (LNG) project and will also share 50% rights in petroleum and natural gas in Liard Basin and Horn River, British Columbia, Canada. This joint venture will create tremendous production growth opportunities for both companies and boost their LNG share globally.
Chevron recently announced that it will invest around $33 billion in 2013 on natural gas and crude oil exploration and production plans. With this huge capex plan, the company will initiate exploration and plant production activities in the US (Gulf of Mexico), Australia, Nigeria, Kazakhstan, Republic of Congo, and Angola. The Australian Project has already started and around 55% of construction has been completed. Whereas, the LNG project in Angola will start in 2Q13 and will contribute around 60 mboed, in full capacity. With the help of these new projects, I believe production growth for Chevron to be in the range of 4% - 5% annually for the next two-three years.
Chevron's global expansion initiatives have been a center of attraction for the market as well as investors. Along with this, its continuous share buyback plans have been diverting investors’ opinions. I recommend a buy for this stock.
Tesoro (NYSE: TSO)
BP has agreed to sell its Carson Refinery to Tesoro for $2.5 billion. But, the deal is awaiting a green signal from the Federal Trade Commission (FTC) and from the California Attorney General. Tesoro Management is quite optimistic about getting the government’s approval on the acquisition of BP Carson. This deal will boost Tesoro's barrels per day production substantially to 528,000. It means the company will contribute around 27% of the total gas production in California. With the announcement of this acquisition, the stock of Tesoro has been performing extremely well with a gain of ~31% since December, 2012. The closure of this deal in 2013 will further lead to an upside movement of the stock.
During the last quarter, the company has bought back shares worth $140 million and it will further buyback shares worth $360 million in 2013. Additionally, Tesoro recently declared that it is going to close its Kapolei refinery operations in Hawaii by April, 2013. The Company will use the refinery campus as its storage complex. I expect this discontinued operations will free up around $300 million to $350 million of cash and the company may utilize these funds for further buy back of shares too.
Overall, I am bullish on this stock looking at its deal with BP and the company's commitment towards the buyback programs. I recommend a buy for this stock expecting huge returns in the near future.
During the past few years, energy stocks have appeared as a shining star for the investors around the world. Their higher than expected return has forced more and more investors to include energy stocks in their portfolio. The three companies discussed above are well-placed in this sector with their solid pipeline of projects and lucrative deals. Moreover, these companies remain faithful towards their investors with the continuous buyback programs. I recommend a buy for all three stocks.
ShwetaDubey has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool owns shares of Apache. 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!