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Four Energy Bargains

by: Larry Bellehumeur October 06, 2008 | about stocks: POT / SLB / WFT    

Larry Bellehumeur

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The old adage is that you are supposed to buy low and sell high. A further addition to that statement is the famous line from Warren Buffett saying to buy when "there is blood in the streets". Are we at that stage now? Does the fact that Buffett is on a buying spree now mean that this is the bottom? No one will ever know for sure, but one thing that I do know is that many companies have been unfairly punished recently, and this is a great time for a long-term investor to step in...I was sitting on a bunch of cash in my account, and felt the need to use some of it to buy the following:

Weatherford (WFT)

Previously, I had recommended Weatherford at the $35 level. Imagine my surprise to see it drop down to this level. This is a fabulous company, one that has their reach into many areas of the oil and gas cycle. It is important to remember that oil is still at over $90, which is a record for the "shoulder" season that we are currently in. As well, with all of the economic turmoil, it is amazing to see that oil is still north of $80. This goes to prove that while we aren't necessarily in "peak oil" territory yet, oil is getting harder to find to meet the demand, even in a slowing economy.

Weatherford has clients that include the major oil and gas players, as well as many of the nationalized programs, giving them good International diversity. With the US Heating season starting soon, and the passing of the US Relief package on Friday, this one has some serious upside. Even if they have a serious earnings miss for 2008 (which would be in the $1.90 range, as opposed to the Current estimate of $2.15), this one is still trading at about 10-11x current year earnings. This one could easily rebound to its former ratio of 17-20x current year earnings when the economy starts to turn around in 2009. With an expected 2009 earnings north of $2.50 (conservatively), this one could be a double within 12 months.

Schlumberger (SLB)

Same basic principles as Weatherford, but with a greater international diversity and product offering. Schlumberger has traditionally traded at a good premium to the S&P, and for good reason.

This one should rebound its multiple back to 18 to 20x current year earnings, as well in 2009, making a realistic target of $110 to $120 for SLB.

Petro Canada (PCZ)

Talk about the Rodney Dangerfield of oil stocks. Sure, they have disappointed investors here and there, and yes, there is still some lingering concern that they are owned partly by the Canadian Government (which is not true anymore, and hasn't been for years). There is also the concern of some cost over-runs on their Oil Sands projects in Canada (Fort Hills).

However, oil companies throw off a tremendous amount of free cash flow at this price point for oil, and PCA is no exception. It is possible for PCA to actually generate $11CDN per share in free cash flow this year. That makes this stock a bargain as it is trading for 3x its current year cash flow! Although cash flow is how I judge oil and gas stocks, it's also important to point out that they are trading at about 4-5x 2008 projected earnings.

This one should easily return back to its highs early in the year ($61CDN) within 12 months, as it is too cheap not to. It also has good exposure to the refining and marketing side, giving it strong protection in the event of a dropping oil price.

Potash (POT)

This one was overly priced earlier this year, when it went north of $200. Sure, there is a growing demand for fertilizer, but the stock got way ahead of itself. Well, now, the pendulum has swung way too far the other way, at least in my opinion.

This is still a company that produces a product that is not fully discretionary, unless you enjoy not eating. They may have some of their pricing power reduced during a recession or if ethanol production is reduced, but they are still going to produce tremendous earnings for many years.

Assuming that their earnings projections are lowered due to recent events, it is unlikely that this company will produce less than $10CDN earnings for 2008, meaning that it is trading at less than 11x current year earnings. Taking its 2009 earnings forecast down substantially from its $23CDN analyst average, down to say $15CDN, this one is trading at 7x forward year earnings. Quite the steal to me.

Expect this one to move back up to a more reasonable level of 15x current year earnings, making this one a double in the next 12-18 months, with some relative defensiveness to it.

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This article has 16 comments:

  •  
    Oct 06 06:01 PM
    You recommended Weatherford at the $35 level.
    It traded down to &16.01 at 14:30 pm today.
    Great call, I'll be sure to follow your recommendations---
    all the way to the poorhouse.
    Reply
  •  
    Oct 06 06:08 PM
    Wheat farmers are now selling at below cost. The everybody has to eat theme is pretty much over. Go back to '05-'06 fert pricing and tell us if POT is a bargain. The funds that fueled its rally are under liquidation. Long term support is in the 35-40 range.
    Reply
  •  
    Oct 06 09:20 PM
    p/e's are cheap until the e gets cut to smitherines.
    Reply
  •  
    Oct 06 09:49 PM
    I'd like to add HALLIBURTON. It has a P.E. of 9. More so, it has great exposure to Middle East.
    Reply
  •  
    Oct 06 10:00 PM
    Doji -- You're absolutely correct in that Weatherford has performed badly, no hiding from that fact. I did put my money where my mouth is, and have dropped like a stone. Luckily, all of my investments don't turn out that poorly. Overall, it is a great company, and one that will do well over time, as long as you believe that we are going to need Oil and Natural Gas....This one will be a good buy in 5-10 years, even at a $35 entry point, which is how long I hold most stocks for, at a minimum. Congrats on the fact that you've never had a bad call on a stock! =)

    Alex -- Everyone is entitled to their opinion. In terms of demand, do take into account that once people make the switch from a grain based diet to one that is more based on Protein, they don't tend to go back. It is unlikely that Potash will fall back down to that level because of this, but again, not all of one's picks can be correct.

    Brother -- Agreed. This is why I tried to find stocks that were still going to be decent values, even with fairly strong hits to their "E"

    Bid/Ask -- For some reason, I have never liked HAL. Perhaps it is because I think that if Obama wins, he will open an investigation into some of their Iraq dealings.....Otherwise... it could have easily been on the list....
    Reply
  •  
    Oct 06 10:24 PM
    Also, if Obama wins, he will open some doors for political gain, and at the same time, shut many doors to free trade.
    Why ? Because he promised too much too soon !!
    Reply
  •  
    Oct 06 10:50 PM
    First of all, Doji, what stock did not get slaughtered today at 14:30, MCD was down almost 5 bucks...it's a crazy market...this guy is just trying to provide future insight, I thought that's what investing is about or at least it used to be. Yes, Obama will be a mess, he wants way to much, he'll get if everyone is taxed 50%...if not the dollar will be the new peso. As for Weatherford, it's a good value play, even if they have a few contracts dumped. I hope this financial crisis does not hurt future oil production, our next problem, in five years or so could be $300 oil. A steady reading at $100 should keep the incentive for E&P intact...and help avoid the brutal leap to $200 and beyond. $100 is a fair price for the product.
    Reply
  •  
    Oct 07 08:25 AM
    Larry,
    The adage, "Buy when there is blood in the streets", was, I believe, first iterated by Sir John Templeton, however, I have heard Mr. Buffet state it many times, and more significant, he has employed it's message many more times.
    Reply
  •  
    Oct 07 08:26 AM
    yes HAL's misbehavior in iraq needs to be investigated, as well as cheney's energy task force caper,
    > jack
    Reply
  •  
    Oct 07 09:00 AM
    " Buy when there is blood in the streets" goes WAY back. An earlier version was "Buy when the peasants are revolting" (?). I think it was first attributed to a Rothschild in the French Revolution, but may go back much further (Buy when the Christians are coming - maybe in the crusades?) Nothing like time tested advice. But you have to have nerves of steel and also staying power to take some more pain.

    Just as discolsure, I sold my refineries yesterday down 50% within a few cents of the bottom. A few hours later, we are now up 10% off the low so far.
    Reply
  •  
    Oct 07 09:25 AM
    Worthy -- Thanks for the clarification. Templeton was a great investor for his time, no doubt about that. I had figured that Buffett didn't invent it, but I like to find ways to put his name into anything that I write....=)

    Galt -- A lot of the "nerves" that an investor has depend on what an their situation is. If you are like me (2 decades before retirement, and don't use my investment money for day to day living), then it is easier to be patient than if someone who is retired, and need their nest egg for day to day living.

    I really try never to sell a stock when it is lower than it started out that day (since I could have received a better price a few hours earlier), and I try never to buy a stock on a day that is up for the opposite reason.

    Thanks for everyone for reading! I love all comments, even the ones that call me names.....=)
    Larry
    Reply
  •  
    Oct 07 11:19 AM
    Larry,

    Supply will always grow to meet demand if there are no large barriers to entry, and I believe that I have read of large new supplies coming to market. This has been seen many times (semi's, housing,etc). Ask the Memory industry how their pricing power is today.

    If you are doing the fundamental work on POT, it's Historical trend pricing for it's product is very important and a # i would love to see.
    Reply
  •  
    Oct 07 08:45 PM
    The quote you attributed to Warren Buffet is actually from Baron Phillipe Rothschild. Do some homework for heaven's sake if you are trying to make yourself sound like you know what you're talking about.
    Reply
  •  
    Oct 07 10:49 PM
    275728 -- I think that you are missing my point. The point was to offer advice from the World's greatest investor. Rothschild's opinion on today's financial situation is not nearly as important to me =)

    I do thank you for taking the time to read this article...
    Larry
    Reply
  •  
    Oct 08 03:23 PM
    I agree that all the companies you mentioned are great companie and great buys. The question to ask is when do you buy them? Obviously the most important issue is price. Stocks can languish for years, even great ones. I try to use fundamental analysis when picking stocks, but I throw in a little technical analysis when picking a buy point. I put up a chart of the company then add a 20 day moving average and a 50 day moving average. When the 20 crosses the 50 its a time to buy. Otherwise you are buying into a declining trend. Why would you want to do that?
    If you had owned wft and sold when the 20 crossed under the 50 you'd have gotten out at around 45 and would be sitting pretty on the sidelines waiting to buy wft back.
    Reply
  •  
    Oct 13 11:58 PM
    Larry---I appreciate you addressing all the comments. A lot of times the authors on this site to address the commments posted on their articles. Thanks!
    Reply
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