Create an Ideal Energy Portfolio With These Stocks
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I tend to be particularly bullish on the oil & gas sector. In my view, the growing demand for shale gas runs hand in hand with an economy recovering from the worst crisis since the Great Depression. Below, I highlight several strong companies in different areas of the market that I believe will provide for an ideal energy portfolio.
A Peak at Schlumberger (NYSE: SLB)
Schlumberger is the largest oil field service company in the world. The company has a market cap of around $100 billion and a dividend yield of 1.5%. The global leader in oil field services has, however, been witnessing a decline in revenues in the past three years, which is attributed to the uncertain global economic situation. The company has even witnessed a negative growth rate in some segments over the last three years.
The company recently reported its fourth quarter and 2012 full fiscal year earnings. Revenues increased by $5.19 billion from $36.96 billion in 2011 to $42.15 billion in 2012. Continuing operations amounted to $5.58 billion. The quarterly results showed that revenue stood at $11.17 billion compared to $10.61 billion in the previous quarter of 2012. Revenue in the fourth quarter of 2011 was $10.3 billion. This indicates an increase of $870 million, representing 8% growth y-o-y.
The company has attempted to create value through partnerships. It recently entered into an agreement with Cameroon International Corporation to produce oil related products. Schlumberger has a 40% share in the deal and is required to give some $600 million to the partnership.
It is important to note that Schlumberger's top domestic competitor, Halliburton (NYSE: HAL), recently hit its 52-week high after posting a beat for the fourth quarter that resulted in a 4.6% stock jump. In my view, the rally was more than merited, since the market was too bearish to begin with--still is. The market was looking at volatile guar costs and weak domestic pumping business and projecting it way into the future without accounting for the huge demand from China in shale gas development. At this point, Schlumberger is still at a premium to Halliburton. It trades at a respective 19.6x and 13.4x past and forward earnings. I encourage investors to continue buying shares of Halliburton to profit off of an equilibration in the multiples over time.
Exxon (NYSE: XOM) Looks for Higher Returns Offshore
As an upstream producer that could possibly need Halliburton and Schlumberger's services, Exxon provides additional exposure to the oil & gas market. In my view, the best reason to invest in Exxon is for its stability. For years, the producer has tried to do everything within its power to not invest in politically risky regions.
Now, all eyes are on the Hebron offshore oil field that Exxon acquired at a cost of $14 billion. Even still, however, Exxon hedged against uncertainty by partnering with Chevron in the venture. With reserves of 7 million barrels and a daily output of 150,000 barrels, the venture is expected to increase Exxon’s crude output. The oil field is also not very speculative, as it was found some three decades ago. The extraction was also partly delayed by the global financial crisis, which affected the entire industry.
At 9.5x past earnings and no debt, Exxon is reasonably cheap for its resources. Production has slowed from 1.8 mmboe/d in 2009 to 1.6 mmboe/d in 2011, but new partnerships suggest a turnaround. The partnership with Statoil, for example, in exploring offshore gas near Tanzania looks promising. 9 Tcf of gas has been found thus far and 3 Tcf more is needed to provide commercial viability. The 75% JV interest in exploring offshore resources with Impact Oil & Gas also adds to the upside. As a leader in offshore oil services, Schlumberger can thus complement an investment in Exxon. Since investors are looking for higher returns from Exxon (>5% growth has been disappointing), the company's desire to drill offshore will likely continue to be aggressive. And this could mean a big boon for Schlumberger even if the upstream producer doesn't contract with the service provider but rather shows promising returns.
Exxon, Schlumberger, and Halliburton are strong complimentary investments. While the scale of Exxon and Schlumberger provide for consistent streams of cash flow, the undervaluation of Halliburton allows for a strong risk/reward value play. In my view, I would concentrate investments in Halliburton given that the multiples are at around a 50% discount despite the company having a sharp growth curve ahead. Then I would back Exxon based on its shift towards higher reward plays.
TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Halliburton. 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.