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Until recently, my largest positions were in financial stocks Citigroup (C), Wells Fargo (WFC) and Bank of America (BAC). As a contrarian investor, I do buy on fear and sell on greed as "my pal Warren" has advised for many years. This has worked out to be very profitable over the past 18 months. However, in the past 30 days the financial stocks have dropped to second place in favor of oil and gas stocks.
I think the economic recovery is moving at a snail's pace, lowering anticipated demand for oil while gas was already depressed based on the same factors and the addition of numerous new large supplies. Add to this the mess in the Gulf of Mexico and the public's already negative sentiment about oil companies and you have the makings of depressed pricing in the sector.
I think oil stocks are cheap, and next time we see a Berkshire Hathaway report I would not be surprised to learn there has been an increase in oil company holdings.
You probably could buy just about any oil stock right now and outperform the overall market. For most investors, buying an ETF might be the best bet. My preference would be to stick with old reliable Vanguard and its Energy ETF (VDE), with minimum expenses. It pays a dividend, though less than many of the individual stocks you could acquire, but in place of the higher yield you would receive more stability.
It seems all of the major oil companies are priced for a recession: ConocoPhilips (COP), Chevron (CVX), ExxonMobil (XOM), Royal Dutch Shell ADR (RDS.A), Total SA (TOT ), PetroChina (PTR) and Petroleo Brasileriro (PBR) have low PEs and high yields. The same is true for second tier companies and the network of major support companies. The following are some of the specific numbers.
Price to Earnings
- Petroleo Brasileriro: 10.28
- ConocoPhilips: 10.52
- Chevron: 11.56
- Total SA: 12.11
- ExxonMobil: 13.59
- PetroChina: 14.51
- Royal Dutch Shell: 17.32
These are below market, below company history, in particular with forward looking PEs averaged in (not shown) and in many cases are going 25% lower. The one exception is Shell, which has a PE higher than the market average and I believe is actually the most distorted comparing the trailing figures and the projected, which are half.
Dividend Yield
- Royal Dutch Shell: 6.06%
- Total SA: 5.93%
- ConocoPhilips: 3.80%
- Chevron: 3.67%
- PetroChina: 3.25%
- ExxonMobil: 2.88%
- Petroleo Brasileriro: 2.60%
These yields are very significant and would make a solid contribution to any retirement account, or for an investor needing current income. Even the lowest returning yield of the group, Petroleo, is paying a yield 25% above the market average.
Price to Cash Flow
- Total SA: 5.55
- Chevron: 5.57
- Petroleo Brasileriro: 5.58
- ConocoPhilips: 5.64
- PetroChina: 6.55
- Royal Dutch Shell: 6.96
- ExxonMobil: 7.95
Did anybody say "show me the money"? Cash is king and price to cash-flow has historically been a major indicator of success. Given that the market average is 10, these stocks seem like a bargain. They all have strong balance sheets and the worst of the lot by this metric, Exxon, has the strongest. ExxonMobil's second quarter 2010 earnings were $7.6 billion, an increase of $3.6 billion from the second quarter of 2009.
Price to Sales
- ConocoPhilips: 0.56
- Royal Dutch Shell: 0.66
- Total SA: 0.91
- Chevron: 0.97
- ExxonMobil: 1.2
- PetroChina: 1.46
- Petroleo Brasileriro: 2.25
Here again the numbers tell a story of underpriced stocks. They all are way below market with four of the seven under 1.0.
Even if the economy remains soft, I think demand will go up ahead of growth in GDP and higher earnings for the energy sector will follow. Anyone thinking that Congress will save us from higher prices, think again. We are going to pay for increased regulation. We are going pay for an interruption to off-shore drilling and exploration. We are going to pay because industry insurance is going to get jacked up. Higher prices are coming because China and India are motoring forward with ever-growing industrialization and car ownership.
According to the latest Forbes 500 list of largest companies measured by gross revenue, the oil companies monopolize the top of the list. They also were the hardest hit by revenue loss, in most cases dropping over 30% from 2009. I believe the fact that the industry was by far the largest underperformer (heath care was second) that the contrarian bet is for a comeback.
I have placed my bets as I stated earlier. I have made my single largest holding Royal Dutch Shell (maybe it's the name) with its rewarding dividend, and also have large positions in Transocean (RIG), BP (BP) and Anadarko Petroleum (APC), a long-time favorite.
I do not expect Mr. Buffett to follow my lead into these particular stocks because I do not think he can buy these and forget about them for ten years. However, there is a good possibility that he added to existing positions, the largest of which is ConocoPhilips.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He own shares or options of APC, BP, BRK.B, RDS.A and RIG.
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