1 Oil & Gas Stock to Avoid, 2 to Buy
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As industrial activity picks ups, energy stocks are well positioned to gain ground. For the year to date, Exxon, Conoco, and Chevron have all underperformed the S&P 500 by as little as 791bps to as much as 3,640 bps. I recommend buying on the prospects of a reversal and going for riskier plays, since the market corrections will be largest where betas are highest.
Chevron (NYSE: CVX): A Compelling "Buy"
Over the last 6 months, the price of Chevron's stock has gone up by 11.2%. The stock currently trades at a respective 8.6x and 9.1x past and forward earnings with a dividend yield of 3.1%, which makes risk/reward highly compelling. While this is only slightly below the historical 5-year average PE multiple of 9.1x, it should be considered in the context of flourishing operations. Free cash flow has soared from $6.7 billion in March 2010 to $11.9 billion two years later.
There are several other reasons to be optimistic about Chevron. For one, I like its penetration across a variety of geographies. From China to the $45 billion Australian Gorgon project, there is plenty of room for penetration. It also has meaningful leverage in natural gas, which is starting to recover from a low. Approximately $28.5 billion has been put aside for upstream development in Africa, Brazil, and the Gulf of Mexico.
However, it should also be noted that political and legal risks are greater following the Macondo oil spill. The company and Transocean were recently sued to the tune of $22 billion by Brazil for environmental damages. The EPA is also going after the company for supposedly illegally burning pollutants over a 5 year period. Still, with only 1.4% annual EPS growth forecasted over the next 5 years, the bar has been set low for high risk-adjusted returns.
ConocoPhillips (NYSE: COP) More Attractive Than Exxon Mobil (NYSE: XOM)
If you are looking for safety, Exxon is the way to go. It trades at a respective 9.8x and 11.4x past and forward earnings with a dividend yield of 2.4%. Analysts forecast 6.4% annual EPS growth over the next 5 years, which implies 2016 EPS of $10.19. At a multiple of 16x, the future value of the stock is around $163. Discounting backwards by 10%, the present value of the stock is $101.21 - only a slight premium to the market cap.
Instead of backing Exxon, I recommend investing in another stable producer that has greater upside: Conoco. It has an even greater dividend yield of 4.5% but is unreasonably forecasted for 2% annual EPS declines over the next 5 years. After Third Point successfully pushed Murphy Oil into spinning off the domestic trail business, Conoco is likely to explore selling some of its assets. In fact, the company has already begun to do this with the sale of some of its positions in the North Caspian Operating Company and Lukoil.
At the same time, management is also focused on expanding exploration & production opportunities. The company has been quick to sell plays that end up not fitting into the risk profile and then reinvest the money into natural gas. With the company eying gas in China, it is well positioned to exploit greater industrial demand in emerging markets.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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.If you have questions about this post or the Fool’s blog network, click here for information.
