3 Undervalued Energy Stocks 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 the economy heats up from greater energy demand, investors are encouraged to hunt for oil & gas stocks that are positioned in asset-rich plays. The bears have overly beaten down growth trajectories and there may be some development flops, so I recommend diversifying across several integrated producers.
Occidental Petroleum (NYSE: OXY) Is Undervalued
At 10.9x past and forward earnings, Oxy is a fairly compelling stock. Analysts believe that the company will have nearly 10% 5-year annual EPS growth, and it has a fairly strong balance sheet with $4.4 billion in cash. Although the summer was very volatile, overall trends have delivered double-digit growth at high margins.
Fortunately, the company also has excellent plays that are starting to ramp up protection. With 1.7 million acres just in California, and specifically a position in the Dominguez Field, Oxy is well positioned competitively to supply local downstream operations. The location of the Dominguez Field in Los Angeles also grants Oxy low transportation costs. There are 50 other fields Oxy is developing in California.
I am further optimistic about the company's acquisition strategy. Recent purchases of stakes in the Bakken, for example, position the company to exploit 900 million barrels. Oxy has also beaten expectations 4 out of the last 5 quarters by an average of over 5%.
All things considered, analysts currently rate the stock a "buy" with a $108.67 consensus price target. At a debt-to-equity ratio of 0.19 and a beta of 1.2, Oxy is well positioned to increase production through investments. This will ultimately close the irrational 10% loss experienced for the year to date.
In contrast to Oxy, Marathon has been a loser. Earnings in 4 of the last 5 quarters have been below expectations by an average of 16.2%. Yet during the last twelve months, the integrated oil & gas gained nearly 20% in shareholder value. With that said, the past is not an indicator of the future.
Reuters recently stated that Marathon is looking to divest around 100K acres of Eagle Ford land that is undeveloped. This will help the company pay back its $4.7 billion in net debt and ultimately reduce the cost of debt financing. Lower weighted average cost of capital will help the company generate the most value creation from key catalysts, like Canada's Athabasca oil sands. 20% of this region can be developed through open-pit operations, and there are an estimated ~171 billion barrels of oil to be had.
Compared to Chevron, Marathon is relatively expensive. It trades at a respective 12.3x and 9.2x past and forward earnings, versus corresponding figures of 8.4x and 9x for Chevron. Both companies are forecasted for 5-year annual EPS growth of less than 3%, which I believe is much too pessimistic in light of increasing industrial activity. I especially think it is pessimistic for Chevron, since the major integrated oil & gas company generated 11.5% annual EPS growth over the past 5 years! With a dividend yield of 3.2%, Chevron is worth buying alongside a riskier investment in Marathon.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.