The duck-billed platypus defies all scientific reason.
This beaver-tailed, otter-footed, semi-aquatic creature is the
only mammal on the planet that lays eggs instead of giving live
birth. On top of that, it is the ONLY living representative of
its family and species. Basically, the platypus is an
inexplicable freak of nature. Although the platypus officially
has no relatives, I have a theory that it may be distantly
related to financial and
markets -- which often also look really weird and defy
Recently, I've noticed an odd disconnect between the price of
oil and the performance of oil- and energy-related
. I'm no Dennis Gartman or
, so reading commodity price tea leaves is not my thing. But
there's something going on -- and if there's something quirky
going on in the
world, there's an opportunity to make
Here's an interesting chart of the one-year
on West Texas Intermediate crude (
of this Texas tea is up 13% over a one-year period. Why? Good
question. Typically, oil prices (and the prices of other
commodities) rise when the U.S. dollar is weak. However, that's
not the case.
appeared a little weak at the end of last
, the dollar has spent nearly a year where the value currently
sits with enough volatility in between to make some extremely
coordinated traders some money. But for folks like us, there's
not much change.
As a whole, commodity prices are in a steady downtrend (I
the end of the commodity supercycle
earlier this summer) -- except for oil. What gives? Like the
duck-billed platypus, it defies explanation.
The New Oil Boom
Analysts and investment writers continue to chatter about the new
U.S. oil boom. Thanks to fracking technology and recent
discoveries, American energy security appears within grasp. The
U.S. has become one of the world's largest exporters (yes,
exporters) of refined petroleum products.
However, a glut of global supply is inevitable.
101 tells us that higher supply eventually results in lower
prices, and the global oil supply is heading that way very
quickly. Conventional logic would tell us prices should be lower
or trending lower. They don't seem to be.
Anecdotally, investors usually lift the prices of oil-related
stocks as oil prices climb. This is happening, but only
selectively. Some of these names are commanding unjustified
premiums. However, there are a handful of oil-related stocks that
have been mispriced or overlooked and
extremely attractive value and
potential (and some that aren't as promising).
Oil Patch Bargain Bin
The world's largest independent petroleum refiner and marketer
trades at a nearly 50% discount to the price-to-earnings (
) ratio of the S&P 500
. This $19 billion
cap player is benefiting from increasing domestic oil production,
lower input cost and growth in U.S. refined product exporting.
trade at around $37 with a forward P/E of 9 and a
Petroleo Brasilerio (NYSE:
Petrobras is Brazil's (the B in "BRICs") national oil company.
have cooled recently, Brazil still remains an attractive
opportunity thanks to its young and growing middle class. The
and small pockets of social unrest. That aside, Petrobras has
leveraged its large domestic reserves and exploration success to
position the company as the dominant energy producer in Latin
looks cheap at around $14, a 43% discount from its
, with a forward P/E of 7.3 and a 2.6% dividend yield.
Phillips 66 (NYSE:
Spun off from oil giant
last year, Phillips 66 was the refining and marketing arm of its
former parent. Again, with the upswing in U.S. oil output,
refining is the place to be. The company also holds significant
assets in the natural gas liquids (
) space which, despite low natural gas prices,
be a growth are going forward. With a
of $36 billion, this big company looks downright cheap at around
$59 a share with a forward P/E of 8.3 and a 2.1% dividend
The Dry Holes
While a legend in the oilfield services business and an insanely
well-run company, it's hard to get excited about shares of
Halliburton. The stock price sits near its 52-week high at nearly
$46. The forward P/E isn't all that unreasonable at 14, but the
dividend yield of just above 1% is miserly for a $42 billion
company that generates over $4 billion in annual
free cash flow
. This is a valuation
. The price and the compensation just don't justify ownership. In
addition to the toppy price, too much legal risk remains from the
Deepwater Horizon disaster fallout.
Another legendary name in the oil services business,
Schlumberger, like its archrival Halliburton, looks a little
expensive. Shares trade at around $80 with a forward P/E of 18
(pretty much equal to that of the S&P 500). The company is
also stingy with its annual free cash flow of nearly $9 billion,
paying out a measly 1.5% dividend yield. As with Halliburton,
there's not enough incentive to own the shares. Schlumberger's
overreliance on drilling in the Gulf of Mexico can also be seen
as activity in that region is growing at a slower pace due to
increased activity in land-based exploration in North
Nabors Industries (NYSE:
As the world's largest land oil drilling contractor, it would
seem that Nabors would be a no-brainer route to participating in
the North American oil renaissance. Looking under the hood of
this one tells me otherwise. Earnings growth is less than
earnings per share (
came in at 82 cents. Estimates for 2013 are for 85 cents a share.
growth from the biggest player in a booming sector isn't enough
to get impressed by. Return on
is also unexciting at just 4.2%.The 1% dividend yield isn't that
Risks to Consider:
Oil prices have gone up, which means they are destined to
fall sooner than later. Crowd psychology typically takes over,
which means that the prices of oil related stocks should go down,
too. The lower valuation metrics and decent yields on the stocks
I like should help combat that movement. Also, keep in mind that
we are about to enter the busy portion of hurricane season, this
always has a negative impact on refiners due to their presence on
the Gulf Coast.
Action to Take -->
Collectively, the bargain basket of VLO, PBR, and PSX trade with
an average forward P/E of 8.2 and a dividend yield of 2.23%.
Modest P/E expansion of 25% -- going from a P/E of 7 to a still
cheap P/E of 8.8 -- would result in one-year returns of 25% or
better for the basket. Factoring in the
, potential total return would be north of 27%.