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5 cheapest profitable U.S. oil and gas stocks

This select list of energy stocks could see a nice bounce this year.

  • By Philip van Doorn,
  • MarketWatch
  • – 05/02/2014
  • Energy Sector
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Investors who grew accustomed to the outsized market gains in 2012 and 2013 have had a tougher time this year, but one of the brighter spots has been the energy sector.

The S&P 1500 Energy Index rose 5% in April and is up 6% this year, beating the 2% return for the S&P Composite 1500 (.SPSUPX), after trailing the broad index over the past two years.

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This year's strength for the energy sector reflects investors' discomfort with Russia's annexation of Crimea and the implications for a possible disruption in the flow of winter fuel for Western European countries, many of which rely heavily on Russian natural gas transported via pipelines through Ukraine.

The ongoing production expansion of U.S. oil and natural gas developers and suppliers has led to a significant decline in natural-gas prices over the past five years, although oil prices have more than doubled. But a closer look at the market shows that following huge declines in 2010 and 2011, natural-gas prices rose 12% in 2012 and 26% in 2013.

The action is continuing this year, with the spot price for natural gas at the New York Mercantile Exchange rising 14% this year to $4.82 per million British thermal units on Wednesday.

The daily headlines of continuing unrest in Ukraine, along with the prospect of a possible decision by President Vladimir Putin to "protect" that country's Russian-speaking minority through another invasion, make it quite possible that investors will see a continued rise in natural-gas prices, along with a concurrent rise in prices for energy stocks.

Despite being one of the market's leading sectors this year, energy stocks trade at a discount to the broad market. Stocks included in the S&P 1500 Composite Index trade for an aggregate 14.3 times consensus forward-year earnings estimates, while the S&P 500 Composite Energy index trades for 13.7 times forward earnings.

Using data provided by FactSet, we have identified a select list of five U.S. stocks with the lowest forward P/E ratios among oil and gas producers, integrated oil companies, gas distributors, as well as pipeline operators, oil services and equipment providers, and contract drillers. The list is limited to actively traded names with average daily trading volume of more than 50,000 shares.

In order to come up with a conservative list of names that could be ridden up with relatively low risk if natural gas prices continue to climb, we have limited the companies to those showing profits for the past five full years.

The cheapest stocks among the group are oil and gas producers or integrated oil companies. Taking an even more conservative approach, we have limited the list to companies with a majority of their proven reserves in the United States or Canada. All are oil and natural gas producers:

Cheapest profitable U.S. oil and gas stocks

Company
Forward
P/E
Total Return
12 Months
Total Return
5 Years
Murphy Oil Corp. (MUR)
11.8
23%
80%
ConocoPhillips (COP)
12.3
30%
190%
Marathon Oil Corp. (MRO)
12.3
16%
126%
Northern Oil and Gas (NOG)
12.5
17%
179%
Occidental Petroleum (OXY)
13.4
13%
89%

Companies limited to those with majority reserves in U.S. and Canada; Total returns assume dividends are reinvested; Source: FactSet, based on closing prices on April 29, 2014


These are familiar, quality names. For the most part, sell-side analysts don't expect significant increases in earnings for the group over the next year, however, depending on how much further disruption there is in the energy market, we may see upward estimate revisions for 2015, which would support higher valuations. Of course, a major disruption could also cause forward P/E ratios to go up as well. Here's a quick look at all five companies:

Murphy Oil

The cheapest stock on the list is Murphy Oil Corp. (MUR) of El Dorado, Ark.

The shares closed at $64.53 Tuesday and traded for 11.9 times the consensus 2015 earnings estimate of $5.44, among analysts polled by FactSet. The consensus 2014 EPS estimate is $5.47. Based on a quarterly payout of 31 cents, the shares have a dividend yield of 1.92%.

Murphy Oil earned $1.1 billion, or $5.94 a share during 2013, increasing from $971 million, or $4.99 a share, in 2012. Last year, the company spun off Murphy USA Inc. (MUSA), its U.S. refining business, and also started accounting for its refining business in the United Kingdom as a discontinued operation, in preparation for a sale of that unit.

Income from continuing operations for 2013 was $888 million, or $4.69 a share, increasing from $807 million, or $4.14 a share, during 2012.

Supporting the EPS increase during 2013 was $500 million in share buybacks. The share count declined by 4% last year. Murphy Oil also said it expected to complete $250 million in buybacks during the first quarter.

ConocoPhillips

Second on the list is ConocoPhillips (COP) of Houston, which trades for 12.3 times the consensus 2015 EPS estimate of $6.05, based on Tuesday's closing price of $74.68. The consensus 2014 EPS estimate is $6.04. The stock has returned 7% this year, which is best among the five companies listed here.

Based on a quarterly dividend of 69 cents, the shares have an attractive dividend yield of 3.7%.

ConocoPhillips reported 2013 earnings of $9.2 billion, or $7.38 a share, increasing from $8.4 billion, or $6.72 a share, in 2012. Excluding gains on asset sales, asset impairments in Canada and the U.K., and earnings from the refining business, which was spun-off through Phillips 66 (PSX) in 2012, adjusted earnings rose to $7.1 billion, or $5.70 a share in 2013, from $6.7 billion, or $5.37 a share, in 2012.

Marathon Oil

Marathon Oil Corp. (MRO) of Houston is next, with shares trading for 12.3 times the consensus 2015 EPS estimate of $2.99, when they closed Tuesday at $36.90. The consensus 2014 EPS estimate is $2.96.

The stock has returned 5% this year. Based on a quarterly dividend of 19 cents, the shares have a dividend yield of 2.06%. The company completed $500 million in share buybacks during 2013.

The company is following the industry trend, seeking to sell assets in the U.K. and Norway. Marathon chief financial officer John Sult said at investor conference in February he expected the sales to be completed before the end of the year. The company also expects to "redeploy capital from the sale of the U.K. and Norway businesses," according to Sult.

Marathon Oil reported 2013 income from continuing operations of $1.6 billion, or 2.24 a share, compared to $1.6 billion, or $2.27 a share, in 2012.

Northern Oil and Gas

Shares of Northern Oil and Gas Inc. (NOG) of Wayzata, Minn., closed at $15.28 Tuesday and traded for 12.5 times the consensus 2015 EPS estimate of $1.22. The consensus 2014 EPS estimate is $1.07.

The company in March announced it had bought back roughly 5% of its shares for $39.8 million, since commencing its $150 million repurchase program in August. Northern Oil and Gas's share count declined by 3% during 2013, according to FactSet.

The company reported 2013 earnings of $53.1 million, or 85 cents a share, down from $72.3 million, or $1.15 a share, a year earlier, with the decline "driven by 2013 losses on settled derivatives and losses on the mark-to-market of derivative instruments." The good news included a 45% increase in natural-gas production, along with a 17% increase in oil production.

Occidental Petroleum

Last on the list is Occidental Petroleum Corp. (OXY) of Los Angeles, with shares closing at $96.87 Tuesday and trading for 13.4 times the consensus 2015 EPS estimate of $7.22. The consensus 2014 EPS estimate is $7.04.

The company reported 2013 net income of $5.9 billion, or $7.32 a share, increasing from $4.6 billion, or $5.67 a share, in 2012. Excluding non-core items, such as a gain on the sale of a pipeline and impairment charges during both periods, core earnings for 2013 came to $5.6 billion, or $6.95 a share, down from $5.8 billion, or $7.09 a share, in 2012.

The company saw a slight decline in production during 2013, and improving U.S. results were offset by lower prices and higher costs overseas.

Occidental Petroleum CEO Stephen Chazen in his earnings presentation on Jan. 30 emphasized the firm’s efficiency improvements, including a 24% reduction in drilling costs, as well as an increase in return on capital to 12.2% in 2013 from 10.3% in 2012.

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Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
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