Oil and gas companies should play a part in any portfolio. There are numerous companies in the sector and they cover a wide spectrum of risk. The companies also cover a wide range of stock types, from dividend rich income stocks to risk intensive growth stocks. In this article, I examine five stocks and contribute some insight into where the stock may fit into a well balanced portfolio.
Valero Energy (VLO): Valero Energy has been range bound between $16 and $32 per share over the past year and the stock is presently trading in the middle of that range. The company pays out a dividend of $.60 per share that brings about a dividend yield of 2.4% at the stock's current price. This dividend is both paid out on a consistent basis and has recently been raised. The payout ratio on the stock is 8% which is much lower than the industry average of 25% and much lower than the company's nearest competitor BP (BP)'s payout ratio of 21%. I think the company may be in a good position to raise the dividend further in the near term, as the price of refined oil rises. As one of the nations limited refiners the company's revenues are determined by the companies refining margin. This is the price difference between crude oil and the refined products. In my opinion, as consumer demand increases for petroleum byproducts, supply of crude oil remains constant and crude prices stay relatively low Valero's refining margins will improve -- at least in the near term. The input and output prices of course are historically susceptible to wide price swings for one reason or another.
Marathon Petroleum Corporation (MPC): Since the beginning of this year Marathon Petroleum Corporation has gone from $30 per share to around $45 per share-- a gain of around 50%. The stock is also approaching its 52 week high of $47.43 per share but losing a little momentum in the process. In addition to this capital appreciation the company also pays out a dividend of $1 per share that brings in a dividend yield of 2.3% at the stock's current price. This dividend does not have much of a history to deduce information from, as it has only been paid out over the last three quarters. The payout ratio on the stock, however, is only 4% which is much lower than the industry average of 25% and much lower than the company's nearest competitor Cabot Oil & Gas Corp (COG)'s payout ratio of 9%. This suggests the company may be in a good position to raise the dividend further, in my opinion. Marathon Petroleum Corporation was spun off from Marathon Oil Corp. (MRO) on July 1, 2011. The segment consisted of their refinery and retail gas station business and represented one of the company's most profitable divisions. As a standalone company I think Marathon Petroleum has more of a propensity for growth and innovation.
Tesoro Corporation (TSO): Tesoro Corporation has been range bound between $17 and $30 per share for the past twelve months but is currently trading in the upper quartile of that range. Two of the company's closest competitors in the industry are Chesapeake Energy Corporation (CHK) and EOG Resources, Inc. (EOG). Chesapeake Energy Corporation has a current PEG ratio of .82 with a five year earnings growth forecast of 10.4% and EOG Resources has a current PEG ratio of .39 with a five year earnings growth forecast of 67.3%. Tesoro Corporation on the other hand, has a current PEG ratio of 1.49 and is much more expensive comparatively with its five year earnings growth forecast of only 5.7%, in my opinion. Tesoro Corporation is headquartered in San Antonio, Texas and was established in 1968. Prior to 11-2004 the company went under the moniker Tesoro Petroleum Corp. The company refines and retails petroleum products in the United States. In my opinion, Tesoro Corporation may lag behind most of its competitors coming out of this recession for two reasons. First, the company's largest refineries are located on the west coast and the economic recovery in this area is improving at a slower rate than the United States average. Second, legislation to reduce carbon emissions is strong in this area and these restrictions will affect the company's production and profitability. (The law makers in this area are not renowned for their critical thinking skills.)
Western Refining (WNR): Western Refining has had a nice run since the first of the year. Coming off its 52 week low of $11.17 in December the stock is presently trading in the high teens and has showed some strong momentum. In addition to this capital appreciation the company also pays out a dividend of $.16 per share that brings about a dividend yield of .9% at the stock's current price. The company does not have a payout ratio at this time because it just started paying its dividend again this quarter after going three years without one. The company's two closest competitors are Valero Energy (VLO) and ConocoPhillips (COP). Valero Energy presently has a five year expected PEG ratio of .62 and ConocoPhillips presently has a five year expected PEG ratio of 2.00. I think Western Refining is fairly inexpensive, by comparison and in terms of its growth, with a five year expected PEG ratio of only .32. Western Refining is headquartered in El Paso, Texas and operates in the wholesale distribution of petroleum products primarily in Arizona, California, Colorado, Nevada, New Mexico, Texas, and Utah. I think the company faces serious headwinds due to its relatively small size (the company operates only four oil refineries) and increased competition from the major oil companies in the area.
Helmerich & Payne (HP): Helmerich & Payne is coming out of a trough and off of a 52 week low of $35.58 per share it reached in October of 2011. The stock is presently trading around the $65 per share level. In addition to this capital appreciation the company also pays out a dividend of $.28 per share that brings amounts to a dividend yield of .5% at the stock's current price. This dividend is both paid out and raised on a fairly consistent basis. The payout ratio on the stock is only 6% which is well below the industry average of 25% and slightly lower than the company's nearest competitor Valero Energy Corp (VLO)'s payout ratio of 8%. In light of these metrics, it is my opinion that the company will be able to raise the dividend as the price of gas and oil rises. Helmerich & Payne is headquartered in Tulsa, Oklahoma were it was incorporated in 1920 and today accepts contracts to drill of oil and gas wells. The company's land drilling operations are located in Oklahoma, Texas, Arkansas, Alabama, Louisiana, Mississippi, Wyoming, Colorado, California, Utah, New Mexico, Montana, North Dakota, Pennsylvania, and West Virginia. The company also engages in offshore drilling in the United States and internationally. In my opinion, Helmerich & Payne holds a strong competitive advantage with the operation of its FlexRig, a mobile drilling unit that is self contained-- especially in exploratory drilling.
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