Feature Industry Review

A Glimpse at the Oil & Gas Industry – May 2015

A Glimpse

While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the oil & gas industry, selecting the five most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 500 companies reviewed by ModernGraham, 44 were identified as being closely related to the oil & gas industry.  Of those, only five are suitable for the Defensive Investor, four are suitable for the Enterprising Investor, and a whopping 35 are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 118.9% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 24.04.  The industry as a whole, therefore would appear to be slightly overvalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Stars

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

Valero Energy Corporation (VLO)

VALERO_logoValero Energy performs well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the low current ratio as well as the insufficient earnings growth or stability over the last ten years, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $0.54 in 2010 to $4.89 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 1.75% annual earnings growth over the next 7-10 years. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation)

National Oilwell-Varco (NOV)

National_Oilwell_Varco_Logo.svgNational Oilwell Varco passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the short dividend history, while the Enterprising Investor has no initial concerns. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, NOV has grown its EPSmg (normalized earnings) from $3.88 in 2010 to $5.45 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 0.34% annually over the next 7-10 years. In fact, the historical growth is around 8.11% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Chevron Corporation (CVX)

Chevron passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The only issue the Defensive Investor has with the company is the low current ratio. The Enterprising Investor is concerned with the level of debt relative to the current assets, but is willing to overlook those concerns since the company qualifies for the more conservative Defensive Investor. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, Chevron has grown its EPSmg (normalized earnings) from $8.58 in 2010 to $11.43 for 2014. This level of demonstrated growth is well above the market’s implied estimate for earnings growth of only 0.42% annually over the next 7-10 years. In fact, the historical growth is around 6.63% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Helmerich & Payne Inc. (HP)

logo_HPIHelmerich & Payne Inc. is suitable for both the Defensive Investor and the Enterprising Investor.  The company passes all of the requirements of each investor type, which is a rare accomplishment indicative of the company’s strong financial position.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.24 in 2011 to an estimated $5.11 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 2.97% annual earnings growth over the next 7-10 years and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.  (See the full valuation)

Halliburton Company (HAL)

Halliburton_logo.svgHalliburton Company passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The only issue the Defensive Investor has with the company is the low earnings growth over the last ten years, while the Enterprising Investor has no initial concerns. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $2.14 in 2010 to $3.11 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 2.65% annually over the next 7-10 years. In fact, the historical growth is around 9.11% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

The Full List

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Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
APA Apache Corporation S 12/1/2014 $126.59 $62.17 49.11% 9.74 1.61%
APC Anadarko Petroleum Corporation S 12/5/2014 $0.00 $83.56 N/A 39.05 1.29%
BHI Baker Hughes Incorporated D 2/22/2015 $27.46 $64.45 234.71% 19.95 1.06%
CAM Cameron International Corporation E 3/23/2015 $53.91 $51.20 94.97% 16.41 N/A
CHK Chesapeake Energy Corporation S 1/25/2015 $33.98 $14.57 42.88% 16.56 2.40%
COG Cabot Oil & Gas Corporation S 12/1/2014 $17.41 $35.00 201.03% 59.32 0.23%
COP ConocoPhillips S 1/25/2015 $259.85 $65.12 25.06% 9.65 4.48%
CVX Chevron Corporation D 2/27/2015 $210.75 $105.02 49.83% 9.19 4.08%
DNR Denbury Resources Inc. S 8/9/2014 $33.66 $7.21 21.42% 6.44 3.47%
DO Diamond Offshore Drilling Inc S 2/27/2015 $0.00 $31.81 N/A 7.21 1.57%
DVN Devon Energy Corp S 1/26/2015 $83.74 $64.78 77.36% 17.75 1.48%
EOG EOG Resources Inc S 5/28/2014 $80.28 $90.26 112.43% 30.39 0.74%
EQT EQT Corporation S 5/9/2015 $4.66 $88.14 1891.42% 51.24 0.14%
ESV ENSCO PLC S 7/21/2014 $27.20 $24.66 90.66% 4.92 2.43%
FTI FMC Technologies, Inc. E 5/11/2015 $50.17 $41.16 82.04% 18.62 N/A
GAS AGL Resources Inc. S 1/6/2015 $20.93 $50.38 240.71% 18.06 4.05%
HAL Halliburton Company D 3/5/2015 $68.98 $45.07 65.34% 14.49 1.60%
HES Hess Corp. S 5/12/2015 $25.89 $67.70 261.49% 14.47 1.48%
HP Helmerich & Payne, Inc. D 5/16/2015 $131.91 $72.47 54.94% 14.18 3.79%
KMI Kinder Morgan Inc S 5/14/2014 $0.00 $42.86 N/A 43.73 4.48%
MRO Marathon Oil Corporation S 3/21/2015 $10.69 $27.33 255.66% 8.09 3.07%
MUR Murphy Oil Corporation S 11/17/2014 $24.75 $42.92 173.41% 9.37 3.26%
NBL Noble Energy, Inc. S 2/14/2015 $38.07 $44.23 116.18% 19.06 1.63%
NBR Nabors Industries Ltd. S 2/27/2015 $0.00 $14.94 N/A 21.04 1.61%
NE Noble Corporation New Common Stock – Switzerland S 4/8/2015 $0.00 $16.63 N/A 10.20 9.02%
NFX Newfield Exploration Co. S 6/1/2014 $0.00 $36.97 N/A N/A N/A
NOV National-Oilwell Varco, Inc. D 3/31/2015 $112.64 $49.96 44.35% 9.17 3.68%
OXY Occidental Petroleum Corporation S 6/11/2014 $94.98 $75.84 79.85% 11.30 3.96%
PSX Phillips 66 S 12/19/2014 $230.79 $80.70 34.97% 13.47 2.78%
PXD Pioneer Natural Resources S 1/5/2015 $0.00 $152.97 N/A 107.73 0.05%
QEP QEP Resources Inc S 2/15/2015 $0.00 $19.68 N/A 17.26 0.41%
RDC Rowan Companies PLC S 3/29/2015 $0.00 $21.95 N/A 15.03 1.82%
RIG Transocean LTD S 5/14/2015 $0.00 $18.97 N/A N/A 15.81%
RRC Range Resources Corp. S 8/18/2014 $25.10 $58.35 232.47% 89.77 0.27%
SE Spectra Energy Corp. S 4/9/2015 $13.51 $35.88 265.58% 22.71 4.12%
SLB Schlumberger Limited. E 4/6/2015 $65.81 $90.56 137.61% 21.21 2.21%
SPH Suburban Propane Partners LP S 1/23/2015 $0.00 $43.81 N/A 28.63 8.10%
SWN Southwestern Energy Company S 12/10/2014 $18.22 $26.78 146.98% 22.13 N/A
TDW Tidewater Inc. S 6/12/2014 $0.00 $26.60 N/A 9.85 3.76%
TSO Tesoro Corporation S 10/16/2014 $151.84 $91.21 60.07% 23.15 1.86%
VLO Valero Energy Corporation E 4/8/2015 $188.16 $59.88 31.82% 12.25 2.67%
WMB Williams Companies, Inc. S 2/2/2015 $24.95 $53.08 212.75% 81.66 4.37%
WPX WPX Energy Inc S 7/20/2014 $0.00 $13.14 N/A N/A N/A
XOM Exxon Mobil Corporation S 6/3/2014 $125.80 $86.99 69.15% 11.04 3.36%

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To view the MG Value and PEmg information,  you must be logged in as a premium member.  Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
APA Apache Corporation S 12/1/2014 —- $62.17 —- —- 1.61%
APC Anadarko Petroleum Corporation S 12/5/2014 —- $83.56 —- —- 1.29%
BHI Baker Hughes Incorporated D 2/22/2015 —- $64.45 —- —- 1.06%
CAM Cameron International Corporation E 3/23/2015 —- $51.20 —- —- N/A
CHK Chesapeake Energy Corporation S 1/25/2015 —- $14.57 —- —- 2.40%
COG Cabot Oil & Gas Corporation S 12/1/2014 —- $35.00 —- —- 0.23%
COP ConocoPhillips S 1/25/2015 —- $65.12 —- —- 4.48%
CVX Chevron Corporation D 2/27/2015 —- $105.02 —- —- 4.08%
DNR Denbury Resources Inc. S 8/9/2014 —- $7.21 —- —- 3.47%
DO Diamond Offshore Drilling Inc S 2/27/2015 —- $31.81 —- —- 1.57%
DVN Devon Energy Corp S 1/26/2015 —- $64.78 —- —- 1.48%
EOG EOG Resources Inc S 5/28/2014 —- $90.26 —- —- 0.74%
EQT EQT Corporation S 5/9/2015 —- $88.14 —- —- 0.14%
ESV ENSCO PLC S 7/21/2014 —- $24.66 —- —- 2.43%
FTI FMC Technologies, Inc. E 5/11/2015 —- $41.16 —- —- N/A
GAS AGL Resources Inc. S 1/6/2015 —- $50.38 —- —- 4.05%
HAL Halliburton Company D 3/5/2015 —- $45.07 —- —- 1.60%
HES Hess Corp. S 5/12/2015 —- $67.70 —- —- 1.48%
HP Helmerich & Payne, Inc. D 5/16/2015 —- $72.47 —- —- 3.79%
KMI Kinder Morgan Inc S 5/14/2014 —- $42.86 —- —- 4.48%
MRO Marathon Oil Corporation S 3/21/2015 —- $27.33 —- —- 3.07%
MUR Murphy Oil Corporation S 11/17/2014 —- $42.92 —- —- 3.26%
NBL Noble Energy, Inc. S 2/14/2015 —- $44.23 —- —- 1.63%
NBR Nabors Industries Ltd. S 2/27/2015 —- $14.94 —- —- 1.61%
NE Noble Corporation New Common Stock – Switzerland S 4/8/2015 —- $16.63 —- —- 9.02%
NFX Newfield Exploration Co. S 6/1/2014 —- $36.97 —- —- N/A
NOV National-Oilwell Varco, Inc. D 3/31/2015 —- $49.96 —- —- 3.68%
OXY Occidental Petroleum Corporation S 6/11/2014 —- $75.84 —- —- 3.96%
PSX Phillips 66 S 12/19/2014 —- $80.70 —- —- 2.78%
PXD Pioneer Natural Resources S 1/5/2015 —- $152.97 —- —- 0.05%
QEP QEP Resources Inc S 2/15/2015 —- $19.68 —- —- 0.41%
RDC Rowan Companies PLC S 3/29/2015 —- $21.95 —- —- 1.82%
RIG Transocean LTD S 5/14/2015 —- $18.97 —- —- 15.81%
RRC Range Resources Corp. S 8/18/2014 —- $58.35 —- —- 0.27%
SE Spectra Energy Corp. S 4/9/2015 —- $35.88 —- —- 4.12%
SLB Schlumberger Limited. E 4/6/2015 —- $90.56 —- —- 2.21%
SPH Suburban Propane Partners LP S 1/23/2015 —- $43.81 —- —- 8.10%
SWN Southwestern Energy Company S 12/10/2014 —- $26.78 —- —- N/A
TDW Tidewater Inc. S 6/12/2014 —- $26.60 —- —- 3.76%
TSO Tesoro Corporation S 10/16/2014 —- $91.21 —- —- 1.86%
VLO Valero Energy Corporation E 4/8/2015 —- $59.88 —- —- 2.67%
WMB Williams Companies, Inc. S 2/2/2015 —- $53.08 —- —- 4.37%
WPX WPX Energy Inc S 7/20/2014 —- $13.14 —- —- N/A
XOM Exxon Mobil Corporation S 6/3/2014 —- $86.99 —- —- 3.36%

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Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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