Spurred by expectations for rising fuel demand as the U.S. works to expand its pandemic aid payments and a final Brexit deal is anticipated to stabilize trade between the U.K. and Europe in 2021, oil prices rose on Tuesday morning.
Brent crude climbed 1% to $51.38 per barrel, while West Texas Intermediate futures gained 1.1% to $48.15 per barrel.
As a result of these developments, investors may be interested in finding opportunities among companies in the oil and gas industry for the New Year.
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 Dorian LPG Ltd. (LPG, Financial) as an example, we can see that the stock is considered to be modestly undervalued. 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.
As of Dec. 29, the GuruFocus All-in-One Screener, a Premium feature, found oil and gas companies that were modestly undervalued, had a price-to-GF value between 0.4 and 0.8, a price-earnings ratio between one and 15 and a predictability rank of at least one out of five stars were Enterprise Products Partners LP (EPD, Financial), Magellan Midstream Partners LP (MMP, Financial), MV Oil Trust (MVO, Financial), Sabine Royalty Trust (SBR, Financial) and Western Midstream Partners LP (WES, Financial).
Enterprise Product Partners
Enterprise Product Partners has a $42.89 billion market cap; its shares were trading around $19.68 on Tuesday with a price-earnings ratio of 9.53, a price-book ratio of 1.72 and a price-sales ratio of 1.54.
The Houston-based midstream company operates pipelines to transport natural gas and crude oil.
Based on a GF Value of $24.59 and a price-to-GF Value ratio of 0.8, the stock appears to be modestly undervalued.
The GuruFocus valuation rank of 6 out of 10 also points to undervaluation.
GuruFocus rated Enterprise Product Partners' financial strength 4 out of 10 as a result of issuing approximately $5.2 billion in new long-term debt over the past three years. The Altman Z-Score of 1.44 also warns the company could be at risk of bankruptcy if it does not improve its liquidity position.
The company's profitability fared better, scoring a 7 out of 10 rating on the back of an expanding operating margin. Enterprise Product Partners is also supported by returns that outperform a majority of competitors as well as a moderate Piotroski F-Score of 5, which suggests business conditions are stable. Due to recording a decline in revenue per share over the past five years, the one-star predictability rank is on watch. According to GuruFocus, companies with this rank return, on average, 1.1% annually over a 10-year period.
Of the gurus invested in Enterprise Product Partners, First Eagle Investment (Trades, Portfolio) has the largest stake with 0.13% of outstanding shares. Other top guru shareholders include Louis Moore Bacon (Trades, Portfolio), NWQ Managers (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Mark Hillman (Trades, Portfolio), George Soros (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Ronald Muhlenkamp (Trades, Portfolio).
Magellan Midstream Partners
Magellan has a market cap of $9.5 billion; its shares were trading around $42.53 on Tuesday with a price-earnings ratio of 10.55, a price-book ratio of 3.99 and a price-sales ratio of 3.75.
Headquartered in Tulsa, Oklahoma, the company owns and operates ammonia and petroleum pipelines in the Mid-Continent oil province.
With a GF Value of $57.92 and a price-to-GF Value ratio of 0.74, the stock appears to be modestly undervalued.
The GuruFocus valuation rank of 8 out of 10 also leans toward undervaluation.
Magellan's financial strength was rated 4 out of 10 by GuruFocus. As a result of issuing approximately $600.37 million in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of 1.74 also warns of potential bankruptcy risk as assets are building up at a faster rate than revenue is growing.
The company's profitability scored a 9 out of 10 rating. While the operating margin is in decline, Magellan is supported by returns that are outperforming a majority of industry peers as well as a moderate Piotroski F-Score of 6. The 4.5-star predictability rank is on watch as a result of revenue per share declining over the past 12 months. GuruFocus says companies with this rank return an average of 10.6% annually.
With 0.09% of outstanding shares, Bacon is Magellan's largest guru shareholder. Pioneer, Soros and First Pacific Advisors (Trades, Portfolio) also own the stock.
MV Oil Trust
MV Oil Trust has a $33.23 million market cap; its shares were trading around $2.89 on Tuesday with a price-earnings ratio of 3.15, a price-book ratio of 2.92 and a price-sales ratio of 2.74.
The Houston-based company acquires and holds net profits interests in the oil and natural gas properties of MV Partners LLC.
Trading with a GF Value of $4.05 and a price-to-GF Value ratio of 0.71, the stock appears to be modestly undervalued currently.
MV Oil's financial strength and profitability were both rated 7 out of 10 by GuruFocus. Driven by no long-term debt and a comfortable level of interest coverage, the return on invested capital significantly surpasses the weighted average cost of capital, indicating good value creation.
The company also has strong margins and returns that outperform a majority of competitors, but the low Piotroski F-Score of 3 indicates operating conditions are in poor shape. The one-star predictability rank is on watch as a result of revenue per share declining over the past five years.
No gurus are currently invested in the stock.
Sabine Royalty Trust
Sabine Royalty has a market cap of $417.56 million; its shares were trading around $28.64 on Tuesday with a price-earnings ratio of 10.98, a price-book ratio of 98.08 and a price-sales ratio of 10.18.
Headquartered in Dallas, the company holds royalty and mineral interests in various oil and gas properties in the U.S.
With a GF Value of $36.13 and a price-to-GF Value ratio of 0.79, the stock appears to be modestly undervalued.
Sabine Royalty's financial strength was rated 10 out of 10 by GuruFocus on the back of a comfortable level of interest coverage as well as a robust Altman Z-Score of 415.1.
The company's profitability scored a 7 out of 10 rating, driven by strong margins and returns that outperform a majority of industry peers. Sabine Royalty also has a moderate Piotroski F-Score of 4, but the one-star predictability rank is on watch as a result of revenue per share declining over the past several years.
Chuck Royce (Trades, Portfolio) is Sabine Royalty's largest guru shareholder with a 0.57% stake. Murray Stahl (Trades, Portfolio) also owns the stock.
Western Midstream Partners
Western Midstream has a $5.71 billion market cap; its shares were trading around $13.69 on Tuesday with a price-earnings ratio of 11.44, a price-book ratio of 2.28 and a price-sales ratio of 2.16.
The Woodlands, Texas-based company is involved in the gathering, processing, compressing, treating and transportation of natural gas liquids and other products.
Trading with a GF Value of $18.35 and a price-to-GF Value ratio of 0.75, the stock appears to be modestly undervalued currently.
GuruFocus rated Western Midstream's financial strength 3 out of 10. As a result of issuing approximately $4.4 billion in new long-term debt over the past four years, the company has poor interest coverage. In addition, the company has a low Altman Z-Score of 0.86, indicating the potential for bankruptcy, and the WACC eclipses the ROIC, indicating struggles with value creation.
The company's profitability fared better, scoring a 7 out of 10 rating on the back of an expanding operating margin as well as returns that outperform a majority of competitors. Western also has a high Piotroski F-Score of 7, indicating business conditions are in good shape. The one-star predictability rank is on watch, however, as a result of revenue per share declining over the past three years.
David Tepper (Trades, Portfolio), Bruce Berkowitz (Trades, Portfolio) and Soros all have positions in the stock.
Disclosure: No positions.
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