(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA)
A short-lived dip in oil prices followed the death of Libyan dictator Moammar Gadhafi last week, but it may not be the end of its side effects at the gas pump.
Although Libya only oversees production of roughly 2% of the world’s oil, minor disruptions in crude production can have big effects on prices.
“Before civil war broke out, Libya had been producing about 1.5 million barrels of oil per day. As output dried up, European refiners, which buy about 85% of Libya’s output, were hurt badly and prices for Brent crude soared to as high as $127 a barrel in April,” reported Jonathan Berr of Daily Finance.
But the capture and death of Gadhafi relaxed the tensions that had stunted the regions work in oil fields. As a result, oil companies have been able to move towards restoring production levels that may even lead to price stabilization in the long run.
As Berr notes, “Libyan’s light, sweet crude is especially attractive to refiners because it is easier for them to convert it into gasoline and diesel. Getting to it is just a little bit easier now that Gadhafi is gone.”
It may be months before Libya is running at full production again. “As the Associated Press notes, analysts expect Libya to produce 600,000 barrels per day by the end of the year and 1.6 million a day by the second half of next year.”
Oil prices could drop between $10 and $25 per barrel on this scenario, although prices are still at the mercy of an infinite number of possible global events that can disrupt production and demand.
Barring the unforeseeable, Gadhafi’s death may mean greater stability in gas prices, and this could have a beneficial effect on companies that refine and market oil and gas.
To help you explore this idea, we collected data on levered free cash flow, and identified the oil and gas refiners that appear to be most undervalued relative to enterprise value.
At present, these companies are trading at a discount. Will the news from Libya help these companies recover, and eventually trade at a premium again?
Use this list as a starting point for your own analysis.
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1. Marathon Oil Corporation (MRO): Operates as an international energy company with operations in the United States, Canada, Africa, the Middle East, and Europe. Levered free cash flow at $3.29B vs. enterprise value at $18.52B (implies a LFCF/EV ratio at 17.76%).
2. HollyFrontier Corporation (HFC): Operates as an independent petroleum refiner and marketer in the United States. Levered free cash flow at $394.45M vs. enterprise value at $3.92B (implies a LFCF/EV ratio at 10.06%).
3. Sinopec Shanghai Petrochemical Co. Ltd. (SHI): Engages in the production of polypropylene compound products, polypropylene products, acrylic fiber products, petrochemical products, synthetic fibers, resins and plastics, and petroleum products in China and internationally. Levered free cash flow at $303.37M vs. enterprise value at $3.03B (implies a LFCF/EV ratio at 10.01%).
4. CVR Energy, Inc. (CVI): CVR Energy, Inc., together with its subsidiaries, refines and markets transportation fuels in the United States. Levered free cash flow at $268.52M vs. enterprise value at $2.12B (implies a LFCF/EV ratio at 12.67%).
5. Western Refining Inc. (WNR): Operates as an independent crude oil refiner and marketer of refined products in Texas, Arizona, New Mexico, Utah, Colorado, and the Mid-Atlantic region. Levered free cash flow at $340.44M vs. enterprise value at $2.39B (implies a LFCF/EV ratio at 14.24%).