After falling 1% on Monday in anticipation of the OPEC meeting this week, oil prices on Tuesday recovered from another initial dip despite fears that renewed lockdown orders following a spike in coronavirus cases will hamper the nascent recovery in demand.
West Texas Intermediate Crude futures gained 0.85% to $40.44 per barrel, while Brent crude futures rose 1% to $43.14 per barrel.
As the number of new Covid-19 cases and hospitalizations soared in a number of states, most notably California, Florida and Texas, some restrictions on businesses have been reinstated. As such, the market will be closely watching fuel consumption data. Analysts estimate that U.S. gasoline stockpiles fell by 900,000 barrels and crude oil inventories decreased by 2.3 million barrels in the week that ended on July 10.
OPEC and its allies are also meeting this week to discuss production cuts.
As such, investors may be interested in oil and gas companies that are 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 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 July 14, companies that met these criteria included EOG Resources Inc. (EOG, Financial), Energy Transfer LP (ET, Financial), World Fuel Services Corp. (INT, Financial), TC Pipelines LP (TCP, Financial) and Evolution Petroleum Corp. (EPM, Financial).
EOG Resources
The Houston-based oil and gas producer has a $26.41 billion market cap; its shares were trading around $44.99 on Tuesday with a price-earnings ratio of 12.26, a price-book ratio of 1.21 and a price-sales ratio of 1.45.
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 EOG’s financial strength 6 out of 10 on the back of comfortable interest coverage. The Altman Z-Score of 2.35, however, indicates it is under some pressure.
The company’s profitability scored a 7 out of 10 rating, driven by strong margins and returns that outperform a majority of competitors. EOG also has a moderate Piotroski F-Score of 5, which indicates operations are stable, and a one-star predictability rank that is on watch as a result of a slowdown in revenue per share growth over the past 12 months. According to GuruFocus, companies with this rank typically return an average 1.1% annually over a 10-year period.
Of the gurus invested in EOG, PRIMECAP Management (Trades, Portfolio) has the largest stake with 0.64% of outstanding shares. Other top guru shareholders include Bill Nygren (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), John Rogers (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Ken Fisher (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).
Energy Transfer
The midstream energy company, which is headquartered in Dallas, is engaged in natural gas and propane pipeline transportation. Energy Transfer has a market cap of $17.19 billion; its shares were trading around $6.41 on Tuesday with a price-earnings ratio of 9.01, a price-book ratio of 0.87 and a price-sales ratio of 0.32.
According to the Peter Lynch chart, the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 aligns with this analysis.
GuruFocus rated Energy Transfer’s financial strength 3 out of 10. As a result of issuing approximately $2.9 billion in new long-term debt over the past three years, the company has low interest coverage. The Altman Z-Score of 0.88 warns it could be at risk of going bankrupt.
The company’s profitability fared better with a 6 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6. The one-star predictability rank, though, is on watch as a result of a five-year decline in revenue per share.
With a 0.60% stake, David Tepper (Trades, Portfolio) is the company’s largest guru shareholder. David Abrams (Trades, Portfolio), Seth Klarman (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), Pioneer, BP Capital Fund Advisors (Trades, Portfolio), Alan Fournier (Trades, Portfolio), George Soros (Trades, Portfolio), Fisher and Mario Gabelli (Trades, Portfolio) also own the stock.
World Fuel Services
The Miami-based company, which supplies fuel to the marine, aviation and land transportation industries, has a $1.46 billion market cap; its shares were trading around $23 on Tuesday with a price-earnings ratio of 8.28, a price-book ratio of 0.81 and a price-sales ratio of 0.04.
Based on the Peter Lynch chart, the stock appears to be undervalued. The GuruFocus valuation rank of 9 out of 10 aligns with this assessment as the price ratios are all near 10-year lows.
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 7.77 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, which implies business conditions are healthy. Despite recording a decline in revenue per share over the past year, it also has a one-star 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.
TC Pipelines
Headquartered in Houston, the company, which owns and operates natural gas pipelines, has a market cap of $2.16 billion; its shares were trading around $29.83 on Tuesday with a price-earnings ratio of 8.17, a price-book ratio of 3.25 and a price-sales ratio of 5.48.
The Peter Lynch chart and GuruFocus valuation rank of 6 out of 10 suggest the stock is undervalued.
TC Pipelines’ financial strength was rated 3 out of 10 by GuruFocus as a result of poor interest coverage and a low Altman Z-Score of 1.19, which is indicative of potential bankruptcy due to revenue per share declining over the past year.
The company’s profitability fared much 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.
Evolution Petroleum
The Houston-based oil and gas producer has an $85.69 million market cap; its shares were trading around $2.65 on Tuesday with a price-earnings ratio of 7.85, a price-book ratio of 1.12 and a price-sales ratio of 2.4.
According to the Peter Lynch chart, the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 also leans toward undervaluation.
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 4.67 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 industry peers. It also has a moderate Piotroski F-Score of 4. 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.
Of the gurus invested in Evolution Petroleum, Simons’ firm has the largest stake with 7.26% of outstanding shares. Grantham also owns the stock.
Additional opportunities
Two other stocks that qualified for the screener were Matador Resources Co. (MTDR, Financial) and Renewable Energy Group Inc. (REGI, Financial).
EOG Resources and Marathon Petroleum are among the top 10 largest companies in the oil and gas sector. GuruFocus’ Industry Overview shows other top players include Exxon Mobil Corp. (XOM, Financial), Chevron Corp. (CVX, Financial) and ConocoPhillips (COP, Financial).
Disclosure: No positions.
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