logo
  Join        Login             Stock Quote

Refiners Shine, Growth Rewarded, But Value Lags

 December 11, 2012 02:03 PM
 


(By Mani) Most oil and gas stocks are trading below the mid-point of their five-year ranges on P/E and P/CF, based on 2013 consensus estimates. Their net debt ratios are below historical levels, and their dividend yields are higher.

Among the oil and gas companies, shares of Valero Energy Corp. (NYSE: VLO) trades at the lowest P/E of 6.8 times, with Apache Corp. (NYSE: APA) screens the lowest P/CF of 2.9 times.

However, capital spending levels are up on an absolute basis and as a percentage of operating cash flow as strong industry demand for services pressures costs while return on average capital employed lagged.

[Related -Why Growth Is Deep In The Heart Of Texas]

The WTI crude oil price declined 12.7 percent this year while the natural gas price gained 22.6 percent. Despite this diversion, at current prices of $86.70/barrel and $3.45/ million cubic feet (mcf), respectively, the US natural gas price is 76 percent below WTI crude oil on a 6:1 energy equivalent basis.

"The decline in the oil price and the low gas price negatively impacted the stock performance of the majority of oil and gas producers," Oppenheimer analyst Fadel Gheit wrote in a note to clients.

Stocks of the US-based refiners had a record year with gains of more than 70 percent, mainly driven by the record WTI-Brent crude differential, cheap natural gas, growing refined product exports and declining capital spending.

[Related -Apache Corporation (APA): What's Next In Restructuring?]

Among the refiners, Marathon Petroleum Corp. (NYSE: MPC) have surged 86 percent year-to-date followed by HollyFrontier Corp. (NYSE: HFC) which gained 74 percent.

"Most R&M companies have accelerated returning free cash flow to shareholders through increased regular dividends, special dividends, and share buybacks. We think this trend will continue into 2013 as these structural changes will continue to benefit R&M stocks," Gheit said.

Barring supply disruptions in the Middle East, oil prices are expected to decline next year on weaker than expected global demand and stronger production growth in North America, Russia, and Africa.

"We expect natural gas prices to trend higher, but to encounter resistance above $4/mcf because of the industry's short response time to rising prices, which would boost supply," Gheit noted.

Excluding the refiners, oil and gas stocks have significantly lagged the S&P 500 this year, despite elevated oil prices and the strong recovery in natural gas prices from their April lows. The under-performance was driven by an expected pullback in oil prices and continued weakness in natural gas prices. The only exceptions were the high-production growth companies, which outperformed the S&P 500.

At the same time, refining stocks have benefited from structural changes of wide crude differentials, cheap natural gas, growing product exports and declining CAPEX, which have boosted free cash flow and allowed companies to accelerate returning cash to shareholders through regular and special dividends and share buybacks.

"Although a repeat of this year's record share price gains is unlikely, we think valuation remains attractive and the upside potential remains high," the analyst wrote.

Meanwhile, too many small companies with limited human and financial resources are crowding most unconventional oil and gas plays, paving the way for industry consolidation.

"We think takeover premiums are likely to be low, especially for smaller companies," Gheit noted.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageIntel Corporation (INTC): Analysts believe PC Replacement Cycle Will Stretch Valuation Metrics

Intel Corporation (NASDAQ:INTC) rocked on Humpday thanks to better than expected earnings, forward guidance read on...

article imageSanDisk Corporation (SNDK) Q2 Earnings Preview: Beat and Pop

SanDisk Corporation (NASDAQ:SNDK) will host a conference call Wednesday, Jul. 16, 2014 at 2 p.m., Pacific, read on...

article imageAtwood Oceanics, Inc. (ATW) and ENSCO PLC (ESV): Kick the Tire Time Say BMO

It is time to think about buying offshore drillers so says BMO Capital Markets analysts Alan Laws and read on...

article imageeBay Inc. (EBAY) Q2 Earnings Preview: Cyberattacking Earnings?

eBay Inc. (NASDAQ:EBAY) will release its financial results for the second quarter of 2014 after the market read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.