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Sydnee Gatewood
Sydnee Gatewood
Articles (3098) 

5 Energy Companies to Consider as Oil Prices Remain on Shaky Ground

These stocks are significantly undervalued based on the GF Value line

Hindered by a decrease in global travel and an economy that is still trying to recover from the coronavirus pandemic, oil prices are expected to continue to struggle going into the final quarter of the year.

CNBC reported that analysts forecast the prices of Brent and West Texas Intermediate crude should increase to the low to mid-$40s per barrel over the next several months, but there is still potential for another drop as demand isn't picking up as quickly as previously anticipated.

On Friday morning, the commodity slid even further on the news that President Donald Trump and First Lady Melania Trump both tested positive for Covid-19. Brent crude was down 3.57% at $39.47 per barrel, while WTI crude declined 3.49% to $37.37 per barrel.

As a result of these developments, investors may be interested in taking advantage of opportunities found among S&P 500 companies in the oil and gas industry.

Using the GuruFocus Fair Value Line, a new unique method of estimating the intrinsic value of a stock, investors can find potential value opportunities. Based on the popular Peter Lynch value line, which compares a stock's current price to how much its earnings per share would be worth if it traded at a price-earnings ratio of 15, the GF Value Line takes more than price into account when determining value. It also considers a company's historical price-earnings, price-book, price-sales and price-to-free cash flow ratios, an adjustment factor based on past returns and growth as well as future estimates of the business' performance.

Using the GF Value Line for Exxon Mobil Corp. (NYSE:XOM) as an example, we can see that the stock is considered to be a potential value trap. The share price is represented by the blue line, while the solid black line shows the past intrinsic values calculated by the GF Value Line. The dotted portion of the black line illustrates the estimates of future intrinsic value. The red and green bands delineate overvaluation and undervaluation, respectively, with the darker shades indicating more severe deviations from the intrinsic valuation.

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As of Oct. 2, the GuruFocus All-in-One Screener, a Premium feature, found energy companies that were significantly undervalued, had a price-to-GF value between 0.4 and 0.8 and a predictability rank of at least one out of five stars were ConocoPhillips (NYSE:COP), EOG Resources Inc. (NYSE:EOG), HollyFrontier Corp. (NYSE:HFC), Pioneer Natural Resources Co. (NYSE:PXD) and Valero Energy Corp. (NYSE:VLO).

According to GuruFocus' Industry Overview, two of these companies, ConocoPhillips and EOG Resources, are among the top 10 largest players in the space at 4.2% and 2.5%.

ConocoPhillips

ConocoPhillips has a $34.95 billion market cap; its shares were trading around $32.68 on Friday with a price-earnings ratio of 16.06, a price-book ratio of 1.1 and a price-sales ratio of 1.46.

Based on a GF Value of 47.48 and a price-to-GF Value ratio of 0.68, the Houston-based company, which produces oil and natural gas products, appears to be significantly undervalued.

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The GuruFocus valuation rank of 5 out of 10, however, leans more toward overvaluation.

GuruFocus rated ConocoPhillips' financial strength 5 out of 10. In addition to weak interest coverage, the Altman Z-Score of 2.22 indicates the company is under some pressure. The return on invested capital is also eclipsed by the weighted average cost of capital, indicating the company is not generating good returns on its investments.

The company's profitability scored a 6 out of 10 rating, driven by margins and returns that outperform a majority of competitors. ConocoPhillips also has a moderate Piotroski F-Score of 6, which indicates operations are stable, but the one-star predictability rank is on watch as a result of revenue per share declining over the past several years. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

Of the gurus invested in ConocoPhillips, Ken Fisher (Trades, Portfolio) has the largest stake with 0.45% of outstanding shares. Other top guru shareholders include Pioneer Investments (Trades, Portfolio), Tweedy Browne (Trades, Portfolio), Yacktman Asset Management (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss.

EOG Resources

EOG Resources has a market cap of $20.02 billion; its shares were trading around $34.22 on Friday with a price-earnings ratio of 56.38, a price-book ratio of 0.99 and a price-sales ratio of 1.52.

With a GF Value of 75.29 and a price-to-GF Value ratio of 0.46, the Houston-based oil and gas producer appears to be significantly undervalued.

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The GuruFocus valuation rank of 7 out of 10 supports this assessment since the share price and price-book ratios are both approaching 10-year lows.

EOG's financial strength was rated 6 out of 10 by GuruFocus. While the company has adequate interest coverage, the Altman Z-Score of 1.91 suggests it is under some pressure since the WACC surpasses the ROIC.

The company's profitability scored a 7 out of 10 rating, driven by margins and returns that outperform over half of its competitors, a moderate Piotroski F-Score of 5 and a one-star predictability rank that is on watch due to a decline in revenue per share over the past 12 months.

With 0.81% of outstanding shares, Bill Nygren (Trades, Portfolio) is EOG's largest guru shareholder. PRIMECAP Management (Trades, Portfolio), Pioneer, the T Rowe Price Equity Income Fund (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Grantham, Jim Simons (Trades, Portfolio)' Renaissance Technologies, John Rogers (Trades, Portfolio), Fisher, Greenblatt, Lee Ainslie (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also own the stock.

HollyFrontier

HollyFrontier has a $3.07 billion market cap; its shares were trading around $19 on Friday with a forward price-earnings ratio of 12.62, a price-book ratio of 0.57 and a price-sales ratio of 0.22.

Trading with a GF Value of 45.43 and a price-to-GF Value ratio of 0.41, the Dallas-based oil and gas producer appears to be significantly undervalued.

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The GuruFocus valuation rank of 9 out of 10 aligns with this assessment, especially since the price-sales and price-book ratios are near 10-year lows.

GuruFocus rated HollyFrontier's financial strength 6 out of 10. Due to issuing approximately $261.4 million in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of 2.33 also indicates it is under some pressure since it has recorded a loss in operating income over the past three years and assets are building up at a faster rate than revenue is growing. The ROIC is also less than the WACC, suggesting issues with generating a profit on its investments.

The company's profitability scored a 7 out of 10 rating on the back of an expanding operating margin. While returns are negative, they still outperform over half of industry peers. HollyFrontier also has a moderate Piotroski F-Score of 5, but the one-star predictability rank is on watch as a result of revenue per share declining over the past year.

Cohen is the company's largest guru shareholder with 0.50% of outstanding shares. Barrow, Hanley, Mewhinney & Strauss, Greenblatt, Pioneer, Chuck Royce (Trades, Portfolio), Simons' firm and Caxton Associates (Trades, Portfolio) are also invested in HollyFrontier.

Pioneer Natural Resources

Pioneer Natural Resources has a market cap of $14.25 billion; its shares were trading around $86.81 on Friday with a price-earnings ratio of 34.41, a price-book ratio of 1.21and a price-sales ratio of 1.76.

Based on a GF Value of 137.1 and a price-to-GF Value ratio of 0.63, the oil and gas producer, which is headquartered in Irving, Texas, appears to be significantly undervalued.

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The GuruFocus valuation rank of 8 out of 10 also points toward undervaluation.

Pioneer's financial strength was rated 6 out of 10 by GuruFocus. In addition to poor interest coverage, the Altman Z-Score of 2.23 indicates the company is under some stress due to the ROIC underperforming the WACC.

The company's profitability scored a 7 out of 10 rating, driven by margins and returns that outperform a majority of competitors as well as a moderate Piotroski F-Score of 4. The 2.5-star predictability rank is on watch, however, as a result of revenue per share declining over the past year.

PRIMECAP has the largest stake in the company with 3.35% of outstanding shares. Other guru shareholders include Pioneer, T. Rowe Price, Simons' firm, Fisher, Grantham, Richard Snow (Trades, Portfolio) and Tom Russo (Trades, Portfolio).

Valero Energy

Valero Energy has a $16.28 billion market cap; its shares were trading around $40.72 on Friday with a price-earnings ratio of 15.41, a price-book ratio of 0.82 and a price-sales ratio of 0.19.

With a GF Value of 73.07 and a price-to-GF Value ratio of 0.54, the San Antonio, Texas-based oil and gas producer appears to be significantly undervalued.

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The GuruFocus valuation rank of 6 out of 10 also leans toward undervaluation since the price-book ratio is near a five-year low.

GuruFocus rated Valero's financial strength 6 out of 10. Since the company has issued approximately $2.2 billion in new long-term debt over the past three years, it has weak interest coverage. The Altman Z-Score of 3.29, however, suggests it is in good standing despite recording an operating income loss over the past three years. The WACC is also higher than the ROIC, implying poor returns on its investments.

Despite having declining margins, the company's profitability scored a 7 out of 10 rating. Valero is being supported by strong returns that outperform over half of its competitors and a moderate Piotroski F-Score of 5. Due to recording a decline in revenue per share over the past year, the one-star predictability rank is on watch.

With 1.03% of outstanding shares, Barrow, Hanley, Mewhinney & Strauss is the company's largest guru shareholder. Pioneer, Simons' firm, Jeff Auxier (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Fisher, Jones, Snow, John Hussman (Trades, Portfolio), Greenblatt and Mario Gabelli (Trades, Portfolio) also see value in the stock.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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