Integrated oil and gas firms have had a lot working against them
the past few years. The U.S.'s slow economic recovery, Europe's
troubled economy, a slowdown in China, numerous political crises
and social unrest in the Middle East (including the recent attack
on an Algerian gas complex) -- all of these issues and more have
led many investors to steer clear of the major oil stocks. Over the
past year, integrated oil and gas plays have gained just 7.4%,
according to Morningstar, far underperforming the broader market.
And over the past three years, while a strong bull market has been
in effect, integrated oil and gas stocks have gained just 6.4%.
But as we move into 2013, some positive signs are emerging for
the big oil stocks. The U.S. economy continues to surprise many
with its resilience, and the nascent rebound in the housing sector
could give it a nice boost this year. China, meanwhile, appears to
have successfully engineered a soft landing, and in recent months
signs have emerged that growth is starting to accelerate there.
And, perhaps most importantly, because of all the fears and worries
of the past few years, many oil and gas stocks are trading at very
In fact, the integrated oil and gas industry is tied for number
one atop my "Validea Value Index", which ranks all industries in
order of their overall valuations. My Guru Strategies (which are
based on the approaches of history's most successful investors) are
finding a number of high-quality, fundamentally sound integrated
oil and gas firms that look like bargains. Here are some of the
best of the bunch. As always, you should consider picks like these
within a well-diversified portfolio.
Eni SpA (
This Italy-based multinational oil and gas firm has a market cap of
more than $94 billion, and it has taken in more than $169 billion
in sales over the past year. Its shares were hit very hard when
European debt crisis fears were at their peak, but over the past
year or so they've rebounded.
My James O'Shaughnessy-based value model thinks Eni has more
room to run. When looking for value plays, O'Shaughnessy targeted
large firms with strong cash flows and high dividend yields. Eni is
plenty big enough, plus it has $13.12 in cash flow per share
(nearly 10 times the market mean), and a 5.2% yield, all of which
help it pass the O'Shaughnessy-based model.
Phillips 66 (
Phillips was spun off from ConocoPhillips last year. The
Houston-based firm has 15 refineries with a net crude oil capacity
of 2.2 million barrels per day, 10,000 owned or supplied branded
marketing outlets, and 15,000 miles of pipeline systems. It also
has major natural gas and chemical operations.
Phillips ($35 billion market cap) gets strong interest from my
Peter Lynch-based model. It considers the firm a "fast-grower" --
Lynch's favorite type of investment -- thanks to its impressive
43.5% long-term earnings per share growth rate. (I use an average
of the three-, four-, and five-year EPS growth rates to determine a
long-term rate.) Lynch famously used the P/E-to-Growth ratio to
find bargain-priced stocks, and when we divide Phillips' 6.6
trailing 12-month (
) price/earnings ratio by that long-term growth rate, we get a PEG
of just 0.15. That falls into this model's best-case category
Lynch also liked conservatively financed firms, and the model I
base on his writings targets companies with debt/equity ratios less
than 80%. Phillips' D/E is 38%, another good sign.
Chevron Corporation (
This California-based oil and gas giant ($226 billion market cap)
is also involved in the lubricant, petrochemical products,
geothermal energy, and biofuels markets. Its trailing 12-month
sales register at nearly a quarter-trillion dollars.
Chevron gets strong interest from my Lynch-based strategy, but
unlike Phillips the model considers it a "slow-grower", thanks to
its single-digit (9.2%) long-term growth rate. Slow-growers are
primarily attractive for their dividends, and Chevron is paying a
solid 3.1% dividend. It's also cheap, trading for just 9.5 times
TTM EPS. For slow-growers, Lynch adjusted the "G" portion of the
PEG to include dividend yield. When we divide Chevron's P/E by the
sum of its growth rate and yield, we get a yield-adjusted PEG of
0.77, which comes in well under the model's 1.0 upper limit.
Chevron also has a debt/equity ratio under 10%, another reason
the Lynch approach likes it.
Lukoil OAO (
Russia-based Lukoil ($56 billion market cap) is the world's largest
privately owned oil and gas company based on proved oil reserves,
and is responsible for about 17% of Russian crude oil production.
Its products are sold in Russia and former USSR republics, as well
as Europe, Asia, and the U.S.
Lukoil gets high marks from my O'Shaughnessy- and Lynch-based
models. The O'Shaughnessy approach likes its size, $16.17 in cash
flow per share, and strong 5.5% dividend yield. The Lynch approach,
meanwhile, considers Lukoil a "slow-grower", because of its 5.7%
long-term growth rate. Lukoil trades for just 5.4 times TTM EPS,
and when we divide that by the sum of its growth rate and yield, we
get a yield-adjusted PEG of just 0.48, a great sign.
Statoil ASA (STO):
Based in Norway, this integrated oil and gas firm ($84 billion
market cap) has operations in three dozen countries across the
globe. It has raked in more than $135 billion in sales in the past
Statoil gets high marks from my Lynch- and O'Shaughnessy-based
models. The Lynch approach considers it a "stalwart" because of its
moderate 15.7% long-term growth rate, the type of firm Lynch found
offered protection in tough times. As with slow-growers, he added
dividend yield to the "G" portion of the PEG for stalwarts. Statoil
has a 5.7 TTM P/E and a 4.1% dividend yield, which, in combination
with that long-term growth rate, make for a stellar 0.29
My O'Shaughnessy-based model also likes Statoil. The firm is
plenty big enough for this model, and its $7.98 in cash flow per
share and 4.1% yield also earn it high marks.
I'm long E, PSX, STO, and LUKOY.