Alan Brochstein had an interesting article about the oil majors this morning in which he discussed some of the potential for the oil majors going into the summer when these companies usually hit their seasonal peaks. We had done a little thought exercise with the refiners the other day, and it might be interesting to do something similar to this group.
The basic assumption is: 2011 equals 2007, that is, the profitability conditions for this sector will be similar to what they were in 2007, when demand for the finished products was strong, the oil price went from 50 to over 90, and most of the companies had record earnings.
Here is a table of the stock prices and forward PE's of the nine stocks mentioned in the above article:
| 1-Nov | Current | EPS Est | FPE | ||
| Apache | APA | 109 | 118 | 11.22 | 10.52 |
| Andarko | APC | 67.61 | 77.55 | 3.29 | 23.57 |
| Conoco/Phillips | COP | 61.81 | 71.44 | 6.72 | 10.63 |
| Chevron/Texaco | CVX | 84.98 | 96.62 | 10.52 | 9.18 |
| Devon | DVN | 70.78 | 88.24 | 6.09 | 14.49 |
| Halliburton | HAL | 31.92 | 46.13 | 3.49 | 13.22 |
| Marathon | MRO | 33.92 | 45.48 | 4.79 | 9.49 |
| Occidental | OXY | 84.23 | 97.21 | 8.84 | 11.00 |
| Schlumberger | SLB | 75.66 | 88.84 | 4.99 | 17.80 |
| Exxon/Mobil | XOM | 70 | 83.03 | 8.04 | 10.33 |
The EPS estimate is the analyst average per Yahoo Finance for either 2011, or if available, 2012. The average, as Mr. Brockstein points out, is around 15.
Here are the same stocks performance in 2007. The January 1 price, the price at the 2007 peak, and the PE of the stock at the time of the peak. Some of these companies had their peak at the beginning of 2008, so there might have been some additional upside:
| Jan-07 | Peak 2007 | 2007 EPS | 2007 Peak PE | |
| APA | 65.25 | 104.92 | 8.39 | 12.51 |
| APC | 41.83 | 63.96 | 6.02 | 10.62 |
| COP | 67.42 | 90.17 | 7.22 | 12.49 |
| CVX | 70.55 | 93.35 | 8.77 | 10.64 |
| DVN | 67.66 | 92.56 | 8 | 11.57 |
| HAL | 29 | 41.16 | 3.65 | 11.28 |
| MRO | 42.96 | 66.25 | 5.69 | 11.64 |
| OXY | 44.4 | 78.1 | 6.47 | 12.07 |
| SLB | 59.2 | 109.84 | 4.2 | 26.15 |
| XOM | 72.66 | 95 | 7.38 | 12.87 |
So now, we can tell how these stocks are priced, relative to where they were on the best day in 2007. A lower PE right now means that there's more potential upside, a higher PE means that the stock is more expensive right now, relative to where it was at the absolute peak of the best year ever, based on earnings:
Here is the list, in order of the "relative inexpensiveness" of the stocks: The higher up on the list, the more of a bargain.
| FPE | 2007 Peak PE | Diff | |
| SLB | 17.80 | 26.15 | -8.35 |
| XOM | 10.33 | 12.87 | -2.55 |
| MRO | 9.49 | 11.64 | -2.15 |
| APA | 10.52 | 12.51 | -1.99 |
| COP | 10.63 | 12.49 | -1.86 |
| CVX | 9.18 | 10.64 | -1.46 |
| OXY | 11.00 | 12.07 | -1.07 |
| HAL | 13.22 | 11.28 | 1.94 |
| DVN | 14.49 | 11.57 | 2.92 |
| APC | 23.57 | 10.62 | 12.95 |
Based on this, most of these stocks still have some room on the upside, if, and it's a big if, you feel like 2011 will be like 2007. Foremost among these are XOM and SLB: XOM's forward earnings estimate is $8 per share, which is more than it earned in 2007, with the stock price still $12 below the 2007 peak, and SLB is estimated to earn $4.99, way over the $4.20 it earned in 2007, when the stock went to 109. It's currently at 88.
On the other end of the scale, HAL, DVN and APC are now relatively more expensive, in PE terms, than they were at the peak of 2007.
So, the higher up this list, the better, if, and like we said, it's a big if, 2011 equals 2007.
What are the risks?: Obviously the demand situation right now is completely different than it was in 2007, there are a lot of black swans, potential dark clouds and other things that could happen that could affect demand and send the oil price tumbling, like it did in 2008. Also, the analysts have been known to be wrong... earnings are coming in this week and they are tending to be a little higher than the analysts estimates, but they could just as easily be the other way in another quarter or two. Also, we're living in a world of near zero CD rates, and people are looking around for places to get returns, so their tolerance for risk might be a little different.
But, in general, the higher up that list the better, You make money when you buy a stock, not when you sell it.
The world is chaotic. There are no guarantees on anything.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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