Over the weekend, OPEC and its allied oil-producing countries agreed to extend oil production cuts for another month in an effort to boost the economy in the wake of the Covid-19 pandemic.
Under the prior agreement set in April, the 23-member group began curbing production by 9.7 million barrels per day on May 1, which was slated to extend through the end of June. The cuts would then begin to taper off. From July through the end of 2020, 7.7 million barrels per day would be taken offline, followed by 5.8 million barrels from January 2021 through April 2022.
As a result of Mexico reaffirming its commitment to the prior agreement, July production has now been reduced by 9.6 million barrels per day. The country currently contributes 100,000 barrels daily.
Going forward, the cuts will be reviewed on a monthly basis. The next meeting is scheduled for June 18.
“Effective compliance is vital if we are to secure the hard won stability in the global oil market and restore confidence in the unity and effectiveness of the entire group,” Saudi Energy Minister Prince Abdulaziz bin Salman said during the virtual meeting on Saturday.
While oil prices headed to a three-month high on Friday in anticipation of the meeting, they reversed course on Monday. International benchmark Brent crude was down 2.88% at $41.08 a barrel on Monday morning and West Texas Intermediate crude tumbled 3.31% to $38.24.
As a result of these developments, investors may be interested in looking for value opportunities among oil stocks trading below the Peter Lynch value.
Lynch, the renowned investor who managed Fidelity’s Magellan Fund between 1977 and 1990, developed this strategy in order to simplify his stock-picking process. With the belief good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. The GuruFocus All-in-One Screener, a Premium feature, also looked for companies with a business predictability rank of at least one out of five stars and a 10-year revenue per share growth rate of at least 6%.
As of June 8, companies that met these criteria included Evolution Petroleum Corp. (EPM, Financial), Renewable Energy Group Inc. (REGI, Financial), World Fuel Services Corp. (INT, Financial), Matador Resources Co. (MTDR, Financial) and TC Pipelines LP (TCP, Financial).
Evolution Petroleum
The Houston-based oil and gas producer has a $105.79 million market cap; its shares were trading around $3.23 on Monday with a price-earnings ratio of 9.43, a price-book ratio of 1.37 and a price-sales ratio of 2.89.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 9 out of 10 also supports this analysis.
GuruFocus rated Evolution Petroleum’s financial strength 9 out of 10 on the back of comfortable interest coverage and a high cash-debt ratio of 136.14. The Altman Z-Score of 5.01 also indicates it is in good standing.
The company’s profitability scored an 8 out of 10 rating, driven by an expanding operating margin and strong returns that outperform a majority of competitors. It also has a moderate Piotroski F-Score of 4, which implies conditions are stable. The one-star business predictability rank, however, is on watch as a result of a decline in revenue per share over the past 12 months. According to GuruFocus, companies with this rank typically return an average of 1.1% per annum over a 10-year period.
Of the gurus invested in Evolution Petroleum, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest stake with7.26% of outstanding shares. Jeremy Grantham (Trades, Portfolio) also owns the stock.
Renewable Energy Group
The biodiesel producer, which is headquartered in Ames, Iowa, has a market cap of $1.25 billion; its shares were trading around $31.97 on Monday with a price-earnings ratio of 2.76, a price-book ratio of 1.05 and a price-sales ratio of 0.54.
According to the Peter Lynch chart, the stock is undervalued.
Renewable Energy’s financial strength was rated 8 out of 10 by GuruFocus, driven by comfortable interest coverage, a high Altman Z-Score of 4.38 and a return on invested capital that significantly surpasses the weighted average cost of capital, suggesting good profitability.
The company’s profitability scored a 7 out of 10 rating on the back of strong margins and returns that outperform a majority of industry peers, a high Piotroski F-Score of 7, which implies operations are healthy, and a one-star business predictability rank.
With a 4.99% stake, Grantham has the largest position in the stock. Other top guru investors are Simons’ firm, Hotchkis & Wiley, Pioneer Investments (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
World Fuel Services
The Miami-based company, which supplies fuel to the marine, aviation and land transportation industries, has a $1.91 billion market cap; its shares were trading around $30.36 on Monday with a price-earnings ratio of 10.87, a price-book ratio of 1.07 and a price-sales ratio of 0.06.
Based on the Peter Lynch chart, the stock appears to be undervalued. The GuruFocus valuation rank of 8 out of 10 aligns with this assessment.
World Fuel’s financial strength and profitability were both rated 6 out of 10 by GuruFocus. Although the company has a low cash-debt ratio of 0.45 and inadequate interest coverage, the Altman Z-Score of 7.85 suggests it is in good shape.
The company is also supported by an expanding operating margin, strong returns that outperform a majority of competitors and a high Piotroski F-Score of 7. Despite recording a decline in revenue per share over the past year, it also has a one-star business predictability rank.
Grantham is the company’s largest guru shareholder with 1.46% of outstanding shares. Other top guru investors are Simons’ firm, Chuck Royce (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Hotchkis & Wiley, Barrow, Hanley, Mewhinney & Strauss and Greenblatt.
Matador Resources
The oil and gas producer, which is headquartered in Dallas, has a market cap of $1.39 billion; its shares were trading around $12.12 on Monday with a price-earnings ratio of 6.22, a price-book ratio of 0.72 and a price-sales ratio of 1.32.
The Peter Lynch chart suggests the stock is undervalued.
GuruFocus rated Matador’s financial strength 4 out of 10. Although the company has issued approximately $361.4 million in new long-term debt over the past three years, it is at a manageable level due to sufficient interest coverage. The Altman Z-Score of 0.92, however, warns it could be at risk of going bankrupt since its assets are building up at a faster rate than revenue is growing. In addition, the WACC surpasses the ROIC, suggesting it spends more than it makes.
The company’s profitability fared better with a 7 out of 10 rating, driven by strong margins and returns that outperform a majority of industry peers. Matador also has a moderate Piotroski F-Score of 6 and one-star business predictability rank.
Of the gurus invested in Matador, Royce has the largest position with 0.74% of outstanding shares. Steven Cohen (Trades, Portfolio) and Pioneer also own the stock.
TC Pipelines
The Houston-based company, which owns and operates natural gas pipelines, has a $2.64 billion market cap; its shares were trading around $36.10 on Monday with a price-earnings ratio of 9.81, a price-book ratio of 3.8 and a price-sales ratio of 6.56.
According to the Peter Lynch chart and GuruFocus valuation rank of 6 out of 10, the stock is undervalued.
GuruFocus rated TC Pipelines’ financial strength 3 out of 10 on the back of poor interest coverage and a low Altman Z-Score of 1.29, which is indicative of potential bankruptcy due to revenue per share declining over the past year.
The company’s profitability fared better, scoring a 7 out of 10 rating. In addition to an expanding operating margin, TC Pipelines is being supported by strong returns that outperform a majority of competitors, a moderate Piotroski F-Score of 5 and a one-star business predictability rank.
Energy Income Partners, LLC is currently the company’s largest guru shareholder with a 12.09% stake.
Energy industry overview
Two other energy stocks that qualified for the screener were Energy Transfer LP (ET, Financial) and Northern Oil & Gas Inc. (NOG, Financial).
According to the GuruFocus Industry Overview page, Exxon Mobil Corp. (XOM, Financial) is the largest player in the oil and gas sector, followed by Chevron Corp. (CVX, Financial).
Disclosure: No positions.
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