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Do You Know Warren Buffett and Renaissance Technologies’ Pick in the Oil Producing Segment?

November 29, 2013 | About:
Finding the right long-term investment is an art that demands following a specific industry for enough time to identify the right moment. Following the steps of successful hedge funds will give your portfolio the needed butter. With that reasoning in mind is that I will look at Suncor Energy (SU) and Eni SpA (E).

Important reserves and market positioning

With assets across the US, Canada, and North Sea, Suncor Energy is the largest Canadian energy company. Current production stands at 550,000 barrels of oil equivalent a day and prospects are based on its oil sands assets, which produces more than 330,000 barrels of oil equivalent a day. The company is praised as owning a unique asset base and high return potential for the long run, making the firm an interesting option for a long-term investment. Future outlook is strengthened by the divestiture of excess non-core assets, acquired through the merger with Petro-Canada.

Domestically, Suncor Energy holds a dominant position thanks to its size and is well positioned to benefit from expected higher medium-term oil prices. Conventional reserves and production at offshore Eastern Canada and in the North Sea provide for a strong cash flow. Additionally, the company counts with important unconventional reserves, estimated at 23.5 billion barrels and only second to Saudi Arabia. Last, the firm operates an impressive downstream portfolio.

The merger with Petro-Canada gave Suncor Energy a better competitive position, improved organizational skills and, most importantly, a superior balance between its upstream and downstream operations. These characteristics allow the firm to support its 10 year business strategy that plans to increase production to more than 1 million barrels of oil equivalent per day by 2020, and oil sands production to grow by 10% and company-wide production to grow by 8% in each of the next ten years.

The balance sheet for Suncor Energy is moderate due to a current structure adjustment after an important merger. Currently trading at 19.5 times its trailing earnings, the stock carries an 89% premium to the industry average. Warren Buffet made an important transaction to turn into the largest guru holding a stake in the firm, with a single purchase during the last quarter. I share his optimism amid the undergoing business model adjustment.

Weak domestic environment curtails international expansion

Eni SpA is focused on the exploration and production of oil across 43 countries, with 1.8 million barrels per day of production. Additionally the firm markets gas and power, operates gas pipelines, and has a 43% stake in oil services firm Saipem. As of today, oil and natural gas reserve of 7.2 billion barrels of oil equivalent or 7.09 billion barrels of oil equivalent more than at the end of 2011.

The Italian-based firm is currently involved with control costs policies to recover profitability. Furthermore, overall performance continues to improve at a 4% growth annually and is expected a 3% annually until 2022. Additionally, organic growth of its upstream operations is expected to continue in Cyprus, Egypt, Vietnam, Indonesia, Pakistan and Kenya. More, project start-ups at Algeria, Iraq, Australia, Russia and Egypt as well as strategic position in non-conventional gas, will increase produced volumes in the short-term.

The greatest risk to Eni SpA’s future prospects is the volatility of the industry, added to the weak economic environment at the Euro Zone. Furthermore, considerable competition and saturation in the Italian market adds increasing pressure over operational margins, and there are no catalysts to indicate performance will improve greatly. A highest exposure to the OPEC countries carries greater political risk than its peers to its upstream portfolio.

The balance sheet for Eni SpA continues to improve year-over-year, except for operating margins. Trading at 12.9 times its trailing earnings, the stock carries a 25% premium to the industry average. Technology Renaissance and John Hussman have opted out completely of the firm, while Tom Gayner increased his position. I share the pessimism of Jim Simons’ founded hedge fund due to the weak economic environment.

Following the gurus

I have always preferred Technology Renaissance over any other hedge fund, because I know there is a profitable logic driving all investments made that lacks sentiment. For the same reason, I agree with the pessimism showed by the funds towards the Italian-based firm. Also, Mr. Buffett’s bid on Suncor Energy is a major backing for the firm, and I share his sentiment. Hence, I prefer Suncor Energy over Eni SpA.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

vaninaegea
A fundamental analyst at Lone Tree Analytics

Visit vaninaegea's Website


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