Interesting comments this week in Barron’s. Quoting research from Citi, Barron’s Ben Levisohn wrote:
Sector P/Book ratio of 1.2x is now below 1Q09 and 4Q98 troughs, including making a 6-10% impairment to book values to reflect a $50-70/bbl oil world. We think the industry can drive current returns of 8% (adjusted) back to mid-cycle levels of 14%. Assuming an 8% COE and 0% growth that would put fair value at 1.75x = 45% upside [emphasis Sizemore]. Granted, the pathway will be multi-year and the industry faces headwinds over asset impairments, debt downgrades and possible dividend cuts, but we think the downside looks value-protected…
This will be a long process, but the repair (cost-cutting, better capital allocation) has now started. We recommend that investors position at least benchmark-weight in the group. We recommend taking the weighting through Total (TOT, Financial), BG (BRGYY)(cheaper way into Royal Dutch Shell (RDS.A, Financial)), ConocoPhillips (COP, Financial), Statoil(STO, Financial).
Charles here. I included a chart, courtesy of GuruFocus, to illustrate the point:
With the exception of ConocoPhillips, most of the rest of the global Big Oil majors are trading at the lowest price/book valuation in a generation. The GuruFocus numbers make no adjustments for asset impairments, of which there will no doubt be plenty. But all the same, Big Oil is cheap. It might–just might–make sense to keep at least a modest allocation to the majors, come what may in this market correction.
Disclosures: Long STO, BP
