Oil

  • 15 Nov
    Oil is officially in a bear market – and that could be a good thing for SLB

    Oil is officially in a bear market – and that could be a good thing for SLB

    The stock market has seen a lot of turmoil and turbulence since the beginning of October, with all three major indices touching, or coming very near to the 10% level that most technicians consider correction territory. What you may or may not be aware of, however is that at nearly the same time the stock market was hitting a peak, so was oil – but the decline in the oil market is significantly more severe. As of Wednesday’s close, West Texas Intermediate crude was sitting around $56 per barrel, which marks a decline of more than 26% from its peak on October 2, which topped $76 per barrel.

    The decline isn’t just limited to U.S. oil – the price of Brent crude, which also hit a multi-year high at the same time as WTI, has declined from a little above $86 per barrel to its current price around $66. What is the big driver? Increasing supply, for one; oil inventories across the globe are high and increasing. Late in the summer, Brent prices were driven higher on speculation that economic sanctions on Iran would pressure OPEC oil production capabilities, but even as the U.S. put those sanctions in place, it also granted waivers to eight countries, including China, India, South Korea and Japan who are heavily dependent on Iranian imports. Additional reports suggest that while Iranian production is declining, it is also being more than offset by production increases in Saudi Arabia and the United Arab Emirates.

    In the U.S., shale producers have been boosting production in a major way as well; another complicating factor is the reality that while production in shale-rich areas like the Permian basin are high, pipeline capacity is maxed out, with little hope for short-term relief. That reality has pushed prices for shale coming from that region to as much as $20 per barrel below the going rate for WTI crude in general. New reports now also indicate that pipeline under-capacity is spreading to the Bakken region of the Dakotas as well. Shale producers are producing about 1.3 million barrels per day right now, while the region’s pipeline capacity can only handle about 1.25 million barrels per day. Just as with the Permian, there are projects underway and being proposed to increase the areas capacity, including a proposed “Liberty pipeline” that Phllips 66 and Bridger Pipeline have announced an open season to gauge interest that would move Bakken crude to Wyoming.



    The problem is that pipelines take time to bring online – most of the current projects are forecast to be completed in mid to late 2019, with a number of others expected for 2020. That’s a positive in the long run for U.S. producer’s ability to meet demand, but in the short run it is also contributing pretty heavily to the current pressure, and it doesn’t look like that is going away quickly.

    In his book, The Intelligent Investor, Benjamin Graham (the man who mentored Warren Buffet, and referred to by many as the father of value investing) wrote that when a sector of the economy is in a bear market, a reasonable long-term strategy is to identify the leader in the sector. As long as their balance sheet is healthy, all you have to do is buy in and be willing to wait out the decline for the inevitable decline. Oil producers can be a bit of a mixed bag, since many of even the largest of these companies operate with high debt levels, but a smart way to invest in oil and energy is with the companies that provide the equipment and services explorers, drillers and producers rely on.

    Schlumberger N.V. (SLB) remains the largest oilfield services company in the world, and while some of their fundamental measurements have suffered from some of the same dynamics that have pressured the oil sector throughout the year, the truth is that their balance sheet remains very healthy. They also fit the description of the kind of company that will not only still be around when the sector finally finds bottom, but will also be in a prime position to take advantage of that bottom by acquiring the assets of weaker competitors. The stock’s price performance in the last month is nearly -20%, which is a little less than the sector’s decline. More interestingly, the stock is down more than 40% since reaching its 52-week high at around $80 at the beginning of the year. It may not be done dropping, but if you’re willing to follow Mr. Graham’s advice, this looks like it could be a very good time to think about buying this stock.



    Fundamental and Value Profile

    Schlumberger N.V. provides technology for reservoir characterization, drilling, production and processing to the oil and gas industry. The Company’s segments include Reservoir Characterization Group, Drilling Group, Production Group and Cameron Group. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells. The Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Integrated Production Services (IPS) and Schlumberger Production Management (SPM). The Cameron Group consists of the principal technologies involved in pressure and flow control for drilling and intervention rigs, oil and gas wells and production facilities. SLB has a current market cap of $66.2 billion.

    • Earnings and Sales Growth: Compared to other stocks I’ve highlighted in this space, SLB’s earnings and sales growth has been modest: over the last twelve months, earnings increased 9.5%, while sales increased 7.5%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. By contrast, the company’s Net Income versus Revenue over the last year was -1.9, but improved in the last quarter to 7.5%, which can be taken as an indication their bottom line has improved in the last quarter.
    • Free Cash Flow: SLB’s Free Cash Flow is healthy, at nearly $3.5 billion.
    • Debt to Equity: SLB has a debt/equity ratio of .38, which is conservative and indicates the company has a disciplined approach to debt management. While the company’s cash and liquid assets have declined significantly since the beginning of 2016, they also totaled more than $2.6 billion in the most recent quarter. Their balance sheet indicates that operating margins are more than adequate to service the company’s debt, which was a little over $14 billion in long-term debt in the last quarter.
    • Dividend: SLB pays an annual dividend of $2.00 per share, which at its current price translates to a dividend yield of about 4.18%. The stock’s dividend offers a compelling reason for patient investors to hold this stock, with a current yield well above even long-term Treasury yields, which remain around 3% right now.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SLB is $26.68 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.79. The stock’s historical Price/Book ratio by comparison is 2.66 and puts the top end of the stock’s long-term price target at around $71 per share. The stock’s Price/Cash Flow ratio provides a more conservative target at around $56, since SLB is currently trading a little more than 17% below that historical average. Either way, the long-term upside from the stock’s current price level looks very attractive right now.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: SLB’s downward trend is pretty easy to recognize on this chart – particularly the way that trend has accelerated since the first week in October. The stock is currently in free-fall, dropping below levels not seen since the first half of 2009. Investors naturally correlate SLB’s stock price, and its peaks and valleys, with movement in oil and energy prices. That actually provides another interesting take on the stock’s value proposition, since when WTI crude bottomed at $27 per barrel in 2016, SLB’s price found a bottom at around $65. Crude might not be at a bottom right now, but it remains more than twice as high as that 2016 bottom, while SLB is plumbing levels that are more than 25% below its low point in 2016. Most U.S. producers for the last couple of years have publicly referred to being able to maintain healthy profitability with WTI in the mid-$40 range, which is something that lends credence to the idea that production isn’t going to taper in the U.S. quickly.
    • Near-term Keys: Given the strength of the stock’s current bearish momentum, I don’t think a short-term bullish trade is anything but a speculative, low-probability play right now. Its pivot levels in early 2009 indicate it could find good support in the $45 range, so a pivot and bounce higher from that level could offer some kind of short-term bullish opportunity; but I would wait to see the stock break above $52, where it saw some very short-term stabilization last week before thinking about any kind of near-term bullish trade using call options. Given how close the stock is to support from those 2009 levels, i’m also not sure a bearish trade, either by shorting the stock or buying put options is a very good trade, either. The stock would need to break below $35 to offer a decent bearish signal at this stage. The best bet with SLB right now? Play the long game; but the stock and enjoy the passive income from its high dividend payout while you wait for it to reverse its downward trend and reclaim its highs.


  • 08 Oct
    COP demonstrates why oil stocks might be very attractive growth investments – but don’t call them a good value

    COP demonstrates why oil stocks might be very attractive growth investments – but don’t call them a good value

    A few days ago, I wrote about the fact that oil prices have been surging for the last few weeks. While the price of West Texas Intermediate (WTI) crude has dropped a bit from a peak a little above $76, it remains close it, sitting as of this writing just a little below $74 per barrel. This latest surge has pushed oil prices to levels not seen in four years, when oil in the midst of an historical plunge that didn’t find a bottom until the beginning of 2016. More →

  • 04 Oct
    Oil prices are up, and that could be bad news for highly-valued refining stocks like HFC

    Oil prices are up, and that could be bad news for highly-valued refining stocks like HFC

    If you’ve been paying attention to energy prices over the last six weeks or so, you’ve observed a pretty impressive rally in oil. Since August 15th, when it hit a pivot low at around $65 per barrel, West Texas Intermediate crude has jumped almost 14% to its current level at around $75.50. The surge in Brent crude has been even bigger, going from around $71 per barrel to a little above $86, or almost 22% over the same period. More →

  • 26 Sep
    GPRE: Sometimes a cheap stock is just a cheap stock

    GPRE: Sometimes a cheap stock is just a cheap stock

    If you spend a lot of time paying attention to the stock market, you start to build a pretty long list of stocks that you follow. A lot of the stocks you pay the most attention to are the ones that have been the most productive for you in terms of functional trading; they’re the ones that you’ve been able to turn back to on multiple different occasions, with generally positive results. More →

  • 14 Sep
    Jim Cramer is calling BP “the cheapest oil major” – but these two U.S. stocks look a LOT better

    Jim Cramer is calling BP “the cheapest oil major” – but these two U.S. stocks look a LOT better

    To some people, Mad Money host Jim Cramer is an investing guru. And he certainly draws a fair amount of attention; not only does he host his own show on CNBC every weeknight, but he is also a regular on the station during the early pre-market and opening hours of each trading day, holding forth on his view of current events and their effect on the market. More →

  • 07 Sep
    Why SLCA’s 42% drop since May is a GOOD thing

    Why SLCA’s 42% drop since May is a GOOD thing

    Over the last four years, one of the most interesting segments of the economy to pay attention to has been the energy sector. That doesn’t mean following the biggest players in the the oil industry, although there have been some really interesting investing opportunities among those companies over the last couple of years. It also means keeping track of “energy-related” stocks. Like the smart entrepreneurs during the California Gold Rush More →

  • 04 Sep
    How close is SLB to being a great value play?

    How close is SLB to being a great value play?

    After the market for West Texas Light crude peaked in July 2014 above $105 per barrel, prices plunged to a low around $24 per barrel by the beginning of 2016. That decline set off an even more extended bear market for related stocks like Halliburton Company (HAL) and Schlumberger N.V. (SLB), the world’s two largest oil services companies. According to SLB’s CEO, the industry’s inability to recover even as oil prices stabilized and rebounded to their current levels (as of this writing, WTI crude is around $70 per barrel) is because of the reluctance of global oil producers to invest in new exploration and production (termed E&P) projects. After briefly rebounding to about $80 at the beginning of this year, SLB is about 21% lower and is close to its lowest point in the last two years. Does that mean the stock is a good value right now?

    In their latest quarterly earnings report, SLB’s CEO gave his view of the long-term state of the oil market. In it, he pointed out that while producers have been seeing better results lately, service companies like SLB have been forced to bid for limited project work; the excess equipment available relative to demand has limited the industry’s ability to follow producer’s trends higher, at least until the last quarter. It appears that global markets are finally starting to increase their production activity, which means that the demand for oil services like those provided by SLB is finally starting to improve. In fact, SLB projects that they will have no spare equipment capacity by the end of 2018, which will give them the ability to negotiate more favorable pricing arrangement with their customers.



    Even more favorable in the long term is that while U.S. producers have been able to ramp up production quickly is the relatively short amount of time it takes to drill a shale well. On the other hand, producers in other parts of the world don’t have the ability to bring inactive rigs back online so quickly, but the fact is that OPEC’s spare capacity, which has historically always held some capacity in reserve is at levels not seen since Operation Desert Storm in the early 1990’s. OPEC has finally decided to start increasing production, but that will also require those countries to invest in new products and projects. That means more E&P, which is exactly the kind of tune that oil service companies like to hear. That could offer a great opportunity in the long-term for investors who are interested in investing in this segment of the global economy.

    I think it is important to pay attention to what executives say about their respective markets, certainly even more than it is to track analyst forecasts. However, as a value-oriented investor, I also have to balance that information against what a company has been doing. That means using historical information to determine if the stock’s current price justifies making any kind of a bet on the long-term prospects of any stock I’m thinking about. In the case of SLB, I think the future looks encouraging, and the stock’s current price is intriguing; but based on their performance over the recent past, it doesn’t quite represent the kind of value that would make anxious to find a new opportunity right now. Here are the numbers.



    Fundamental and Value Profile

    Schlumberger N.V. provides technology for reservoir characterization, drilling, production and processing to the oil and gas industry. The Company’s segments include Reservoir Characterization Group, Drilling Group, Production Group and Cameron Group. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells. The Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Integrated Production Services (IPS) and Schlumberger Production Management (SPM). The Cameron Group consists of the principal technologies involved in pressure and flow control for drilling and intervention rigs, oil and gas wells and production facilities. SLB has a current market cap of about $87.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by impressively, at more than 23%, while sales grew a little over 11%. That growth is in contrast to the company’s profile, since over the last twelve months, Net Income as a percentage of Revenues was negative, at -2.34%. The picture has gotten better over the last quarter, which I believe is a reflection of improving market conditions as described by SLB’s CEO, to a little over 5%.
    • Free Cash Flow: SLB’s free cash flow is healthy, at more than $3.5 billion. This number declined from mid-2015, when it was more than $7.5 billion, to a low in mid-2017 at about $3 billion. That’s growth in Free Cash Flow of about 16.6% in the last year.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SLB is $26.66 and translates to a Price/Book ratio of 2.36 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.66, suggesting the stock is only about  12.7% undervalued, with a long-term target price around $71 per share. Using the stock’s Price/Cash Flow ratio shows the stock remains overvalued, since its price is current about 10.5% above that ratio’s historical average. Interestingly, at $56 per share the stock would be roughly in-line with its historical Price/Cash Flow ratio, but 20% below its historical Price/Book ratio. That gives me a good reference point for a minimum price at which I would want to see the stock priced at before I would be willing to say it is discounted enough to justify a new position.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from December 2016 until the end of 2017; it also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. if you discount the temporary, rapid rise from the stock’s trend low point in December 2017 to its peak at about $80 in late January this year, the stock has mostly been holding a sideways trend throughout the year. Last month, the stock dropped below its sideways range up to that point and appears to be establishing a new trading range, with support around $62 and resistance right around $65.
    • Near-term Keys: I would look for a push above July’s peak around $69 to mark any kind of new, potential upward trend; that would be the minimum price that I would begin thinking about any kind of short-term bullish trading opportunities. As a value investor, I would watch the stock with a weather eye on the stock’s trend low from December 2017 around $61 as a critical test of any continued stabilization or price consolidation. A drop below that point would likely give the stock room to drop down into the $56 range – a level the stock hasn’t actually seen since August of 2010. That is where I would start giving a long-term position in the stock some serious thought.


  • 09 Jul
    SLB is down 15% over the last six months – should you buy?

    SLB is down 15% over the last six months – should you buy?

    Over the last month or so, a lot of Energy stocks have been under a bit of pressure. The spread between West Texas Intermediate (WTI) and Brent crude widened to more than $10 per barrel early in June, and that was a big factor that put a lot of U.S. oil stocks – including the companies that service the oil industry – under some strain. Schlumberger NV (SLB) is one that has struggled to maintain any kind of bullish momentum since late January, when it temporarily moved above $80 per share. As of this writing, the stock is down more than 15% from that 52-week high, and appears to be rebounding a bit from a low support point. Does that mean it could be a good time to jump into one of the largest oilfield services companies in the world?

    There are some pretty reasonable economic arguments to be made for taking a position in a company like SLB. Most analysts, including the U.S. Energy Information Agency (EIA) expect oil demand to remain high through the rest of the year, and the U.S. economy in general is projected to keep seeing healthy growth for the foreseeable future. That is usually a positive for energy demand in general and oil specifically. The “rising tide lifts all boats” logic would certainly suggest that these are bullish conditions for energy and energy-related stocks in general, and most specifically for the largest players in their respective markets. Of course, crude and natural gas prices can be volatile, which also means that an unexpected shift in those commodities would be likely to hit stocks like SLB pretty hard. 

    That shift could be a result of a number of broader economic concerns; in mid-2014, oil was at all-time highs, but slowing demand in major economies like China, and emerging economies like Russia, India and Brazil all contributed to a rapid, steep decline that saw WTI drop from around $105 per barrel to about $44 by the end of the year. In the current market, trade tensions between the U.S. and its largest trade partners, along with U.S. sanctions against Iran are contributing to uncertainty that is keeping prices above $70 per barrel. The effect in the long run of trade tensions remains unclear, and markets in general abhor anything that stands in the way of business-as-usual. That could be the largest immediate factor preventing SLB or any other energy-related stock from seeing a big near-term push higher.



    Fundamental and Value Profile

    Schlumberger N.V. provides technology for reservoir characterization, drilling, production and processing to the oil and gas industry. The Company’s segments include Reservoir Characterization Group, Drilling Group, Production Group and Cameron Group. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells. The Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Integrated Production Services (IPS) and Schlumberger Production Management (SPM). The Cameron Group consists of the principal technologies involved in pressure and flow control for drilling and intervention rigs, oil and gas wells and production facilities. SLB has a current market cap of $92.8 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings increasing more than 50%, while sales increased about 13.5%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. It is also noteworthy that the company’s Net Income is nearly 25% of revenue, which means their profit margins are very healthy right now.
    • Free Cash Flow: SLB’s Free Cash Flow is healthy, at about $3.4 billion, but has been declining since late 2015 from a high above $7.5 billion. In addition, Net Income for the company is currently negative, which is an indication they are spending more money than they are bringing in and relying on their cash reserves to make up the difference.
    • Debt to Equity: SLB has a debt/equity ratio of .36, which is conservative. The company has more than $4.1 billion in cash and liquid assets, which means they should be able to keep servicing their debt for the time being without problems. Since the first quarter of 2016, cash and equivalents have declined by more than 70%. This is a big red flag that to me suggests the company is dealing with significant operational problems that have yet to be addressed.
    • Dividend: SLB pays an annual dividend of $2.00 per share, which at its current price translates to a dividend yield of about 2.92%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SLB is $26.95 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.53. The average for the Energy Equipment & Services industry is 2.1, while the historical average for SLB is 2.66. Together, these tell me the stock is fairly valued right now, with little to support an argument for a higher price. Another warning sign to me is the fact that the stock is currently trading more than 17% above its historical Price/Cash Flow ratio. That number signals a drop could push the stock as low as $54 at minimum.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The stock has rebounded from a recent pivot low around $64 (highlighted using the blue, dashed line) in late June and managed to build some bullish momentum to get to its current level around $68.50 per share. It is approaching what I think will be pretty significant resistance between $69.50 and $70 per share, which I’ve highlighted using the red, dashed horizontal line.  If the stock’s current bullish momentum is strong enough to push above that resistance, it would likely find its next support around $75, shown with the yellow, dashed horizontal line. I expect these levels to continue to work against allowing the stock to establish a clear upward trend over anything longer than a short-term period of time.
    • Near-term Keys: If you don’t mind working a short-term trade to capture quick profits, a push above $70 per share could be a good signal to enter a bullish trade, either by buying the stock outright or using call options, with an eye on $75 per share as an exit point. On the other, a break below support around $64 should be a major warning sign for any bullish positions you might have on this stock. It could also be a decent signal to short the stock or work with a bearish trade using put options.


    By Thomas Moore Energy Sector Investiv Daily Oil
  • 05 Jul
    A declining trend in crude inventories could be a good thing for MRO

    A declining trend in crude inventories could be a good thing for MRO

    As little as a month ago, a rare thing happened in the energy market. The spread between the prices of U.S. crude (as measured by West Texas Intermediate, or WTI prices) and OPEC-driven crude (as measured by Brent prices), which normally hovers in a range between $3 and $5 per barrel, increased to about $10 per barrel. WTI crude sank to as low as about $65 per barrel while Brent hovered in a range around $75. Digging into news reports and analysis, it seemed that the difference could be attributed in large part not to U.S. production, which was and remains highs, but rather to problems in the infrastructure (namely, pipelines and storage facilities) that delivers raw product to market. Those problems are focused primarily on the emerging, oil-rich Permian Basin that spans western Texas and eastern New Mexico, where production is being hampered by ongoing infrastructure projects that aren’t scheduled to be completed until sometime in 2020. In the meantime, that limited delivery capacity worked against high production levels to over-inflate inventory levels, which then put severe pressure on crude prices from that region in early June by as much as $11 per barrel lower than standard WTI.

    Over the last couple of weeks, the WTI-Brent spread has returned to mostly normal levels, despite the ongoing capacity issues that linger in the Permian Basin. As of this writing, WTI crude is a bit above $73, with Brent slightly below $78 per barrel. Part of the shift, I think can be attributed to explorers and drillers with the ability to work not only in the Permian, but also in the more established, but still prolific Eagle Ford and Bakken areas. These are areas not only with excellent drilling capability but also plenty of capacity available to get product to market. Marathon Oil Corporation (MRO) is one of the largest exploration and production companies in the Energy sector, with major resources in, and the largest portion of their year-over-year production rise coming from the Eagle Ford and Bakken areas. Since the U.S. Energy Information Administration (EIA) predicts global crude demand will grow to 1.4 million barrels per day through the rest of the year. Most analysts expect the U.S. economy will continue to grow at a healthy pace as well, which should further support crude demand. That bodes well for oil prices, and so for stocks like MRO.



    Fundamental and Value Profile

    Marathon Oil Corporation is an exploration and production (E&P) company. The Company operates through two segments: United States E&P and International E&P. The United States E&P segment explores for, produces and markets crude oil and condensate, natural gas liquids (NGLs) and natural gas in the United States. The International E&P segment explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States, and produces and markets products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol, in Equatorial Guinea (E.G.). MRO has a current market cap of $17.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings more than tripling, while sales increased about 61%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. It is also noteworthy that the company’s Net Income is nearly 25% of revenue, which means their profit margins are very healthy right now.
    • Free Cash Flow: MRO’s Free Cash Flow is very strong, at almost $3 billion. That number has increased since the beginning of 2016, which roughly corresponds with the point where oil prices stabilized after dropping strongly through the last half of 2014 and all of 2015.
    • Debt to Equity: MRO has a debt/equity ratio of .46, which is conservative. Their balance sheet indicates operating profits are more than sufficient to service their debt, with good liquidity to provide additional financial support and flexibility.
    • Dividend: MRO pays an annual dividend of $.20 per share, which at its current price translates to a dividend yield of about 1%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MRO is $14.16 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.47. The average for the Oil, Gas & Consumable Fuels industry is 2.2, while the historical average for MRO is .9. If you work from the historical average, the stock is overvalued right now; however I also take into account the reality this average is skewed by the effect of the collapse of oil prices in mid-2014, from a high around $105 per barrel to a low at the beginning of 2016 at around $30. Energy stocks in general struggled to recover from that 70%-plus drop until late 2017. More appropriate in this case could be the industry average; by this measure the stock’s long-term target price could easily be in the $31 range.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The stock has been holding in a pretty narrow range between $20 and $22 per share since late May, and is currently in the middle of that range. The stock has built a solid upward trend dating back to August of last year. The stock’s current level is the highest it has seen since mid-2015.
    • Near-term Keys: If the stock can find a new surge of bullish momentum, it could push as high as $25 in the near term, based on previous pivot levels seen in early 2015. That kind of move would reconfirm the stock’s long-term bullish trend, which should make the $28 to $30 level attainable over a longer period of time. A break below $20, however would probably push the stock somewhere between $17 and $18 per share to test the long-term trend’s overall strength.


    By Thomas Moore Energy Sector Investiv Daily Oil
  • 05 Jun
    MRO is a bad bet in this market

    MRO is a bad bet in this market

    Yesterday I wrote about the opportunity that I think exists in the energy sector among oil refiners and transportation stocks. That stems from infrastructure challenges that are likely to restrict the ability of oil producers to keep pushing production higher to meet ever-increasing demand. That is one of the factors that is playing itself out right now and is reflected by a much wider than normal spread between WTI and Brent crude prices. I think that limits the upside of U.S. producers like Marathon Oil Corporation (MRO), who have major exposure to the oil fields that are most affected by limited transportation capacity.

    How long is the problem likely to last? There are major projects underway now to expand existing pipeline and storage infrastructure, but even the most optimistic forecasts don’t expect those facilities to come online until late 2019 or even 2020. While crude from areas like the Eagle Ford and SCOOP/STACK oil fields in Texas and Oklahoma are currently running about $11 per barrel below the price of comparable Brent contracts, oil from the Permian basin is even lower, with the spread at nearly $20 per barrel below Brent. Production remains high, which means that companies like MRO are being forced to use more expensive means to get their product to market.



    MRO is a company with a very solid fundamental profile, including solid cash flow that reflects strong balance sheet management over the last several years. That reality, along with an increase in the price of WTI crude from the low $40 range to a little above $70 in late May, helped the stock rally over the same period from a low a little above $10 to its recent peak, reached at about the same time as the peak in WTI, at about $22 per share. That is a one-year, long-term trend that under most circumstances would lead analysts to forecast even more growth. Given the external pressures I’ve already mentioned, however, and the stock’s state as of now as a bit overvalued, I think there is greater downside risk for this stock than there is growth potential.

    Fundamental and Value Profile

    Marathon Oil Corporation is an exploration and production (E&P) company. The Company operates through two segments: United States E&P and International E&P. The United States E&P segment explores for, produces and markets crude oil and condensate, natural gas liquids (NGLs) and natural gas in the United States. The International E&P segment explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States, and produces and markets products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol, in Equatorial Guinea (E.G.). MRO has a current market cap of $17.6 billion.



    • Earnings and Sales Growth: Over the last twelve months, earnings more than tripled, while sales grew more than 50%.
    • Free Cash Flow: Over the last twelve months, Free Cash Flow has Increased steadily and is very strong at more than $2.9 billion as of the company’s most recent earnings statement.
    • Debt to Equity: the company’s debt declined from about $6.7 billion to a little less than $5.5 billion as of the most recent quarter. Their balance sheet indicates that operating profits are abundantly sufficient to service their debt, and also that liquid assets are more than adequate to cover any potential shortfall in operating profits.
    • Dividend: MRO pays an annual dividend of $.20 per share, which translates to an annual yield of a little less than 1% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods uses the stock’s Book Value, which for MRO is $14.16 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.46. The stock’s historical Price/Book Ratio is .9, which is 38% below its current level. The industry average Price/Book ratio is 2.1, which could offer a long-term target for the stock a little above $29 per share. How should an investor resolve the difference? Consider the potential upside versus the downside risk. That translates to a reward: risk ratio of nearly 1:1. Smart investors look for stocks that offer a ratio of 2.5 or 3 to 1 at minimum.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

    MRO 1-year chart

    • Current Price Action: It’s pretty easy to see the strength of the stock’s upward trend since mid-August of last year. The trend peaked last month at about $22 per share and the stock is down marginally from that point. Historically speaking, the stock has shown considerable resistance in the $20 price area, which appears to be coming into play now. If the stock continues to move lower, it should find some stabilization around $19 per share, but a break below that point would probably see the stock test its March swing low around $15.
    • Trends: Basic trend analysis leans heavily on a principle based on the maxim, “the trend is your friend.” The most practical application of this idea uses the next longer trend versus the trade you’re thinking about to dictate your forecast. If you’re thinking about taking a position that would cover anywhere from a few weeks to a few months, the long-term trend is your primary point of reference. In MRO’s case, that would mean you’d take a bullish view of the stock right now. The fact the stock is dropping off of a trend high could actually be a bullish, positive indicator, if the stock breaks above resistance to about $23 per share. A drop below $19.50 would mark a breakdown of the stock’s short and intermediate trends and would increase the likelihood the long-term trend could also reverse.
    • Near-term Keys: Watch the stock’s movement carefully over the next week or so. A break above $22.50 would likely mark a continuation of the long-term trend to new 52-week highs and could mark a good bullish trade, either by buying the stock or working with call options. On the other hand, a break below $19.50 could offer an attractive bearish trade, either by shorting the stock or using put options.


    By Thomas Moore Energy Sector Oil
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