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Holly LaFon
Holly LaFon
Articles (7621) 

With Oil Prices Cratering, Value Gurus Bet the Most on These Energy Stocks

Pricing recovery remains ambiguous

Mason Hawkins (Trades, Portfolio) sold Chesapeake Energy (NYSE:CHK) and Prem Watsa (Trades, Portfolio) reduced Exco Resources (NYSE:XCO) in the last week, stocks crushed by oil prices that continue to languish at their lowest prices since spring of 2016. For investors hanging on for something to change in energy, certain stocks hold more attraction than others.

The energy sector is the worst-performing year to date. In stark contrast to all other S&P 500 sectors in the green, the energy index has dropped 12.8%. Oil prices experienced a hope-giving one-year crest entering 2017, but dipped this week to their lowest since March 2016, at $44.73 per barrel of WTI Crude Friday. The dive came despite OPEC’s pledge in May to cut production by 1.8 million barrels per day to offset chronic oversupply.

The U.S. also continues pumping into the oversupply, producing roughly 15.5 million barrels per day, compared to slightly more than 14 million barrels in mid-2014, when prices started collapsing.

Some believe investors are waiting for a pricing rebound that may never reach levels seen in the past.

“The time is also now (or past) to go fossil fuel free, both for governments seeking energy contracts, as well as investors,” said Kristin Hull, Ph.D., CEO of Nia Impact Advisors. “Any company whose primary business model is still focused on extraction or refinement will be left behind as the transition to clean energy is well under way, regardless of where the US white house stands on the issue.”

Hull said investors should instead redirect their focus to clean energy, like wind turbines, solar technology, wave harnessing and their components. These companies will mostly be found in the tech sector, rather than traditional energy, she said. Some oil and gas companies, such as Exxon Mobil, have begun adding to their solar, wind and biofuels businesses with plans to grow them in coming decades.

Tomer Cohen, founder of Cambridge, Massachusetts-based Five Roads Capital and former Goldman Sachs investment banker, still sees value in oil drillers.

“I view the recent selloff as a great entry point into energy stocks, particularly in fields with lower break-even economics like the Permian,” he said. “The best oil companies restructured their business in 2016 to be profitable at $40 oil, so even with the recent selloff in oil prices, there is still plenty of value left in these businesses.”

The most-bought energy stocks of investors tracked by GuruFocus, most of whom have a value approach, are: Apache Corp. (NYSE:APA), Exxon Mobil Corp. (NYSE:XOM), Devon Energy Corp. (NYSE:DVN), Halliburton Corp. (NYSE:HAL) and Schlumberger Ltd. (NYSE:SLB).

The Top Three

Apache Corp.

Apache is an exploration and production company operating in diverse geographies. In the U.S., it focuses on the Permian region of West Texas and New Mexico, Oklahoma and South East Texas. It also explores and drills in Canada, Egypt and the North Sea of the U.K.

Apache has positioned itself to profit on $50 barrels of oil. Higher oil prices during the first quarter, in addition to the company’s decreased production, strategic international investments and increased investments in the Permian Basin, where barrels cost less to extract, yielded positive financial results in the first quarter.

Apache increased crude oil revenue by $350 million from the first quarter of 2016 to $1.2 billion, on lowered production and higher prices. The average price of crude in the first quarter was $51.20, compared to $31.61 in first-quarter 2016. Higher revenues and leasehold divestitures led to first-quarter net income of $213 million, or 56 cents per share, compared to a loss of $372 million, or 98 loss per share.

The company also ended the quarter with $1.52 billion in cash, up from $1.38 billion at year-end, with debt amounting to $8.5 billion.

Apache’s stock traded down 21.95% year to date. It jumped 3.64% Friday, to close at $49.54 per share.

Exxon Mobil Corp.

Exxon Mobil is the world’s biggest publicly traded international oil and gas company, with exploration and production, refining and chemicals segments. Exxon doubled its investments in the Permian Basin in the first quarter.

Primarily due to the higher commodity prices in the first quarter, cost management and better refining results, Exxon’s earnings increased to $4 billion, or 95 cents per share, compared with $1.8 billion, or 43 cents, the year earlier. The company ended the quarter with cash totaling $4.9 billion, almost flat from $4.8 billion in the first quarter 2016. It had debt of $43.6 billion, compared to $42.8 billion.

Exxon’s share price slid 7.53% year to date. It closed Friday up 1.51%, to $83.49 per share.

Devon Energy Corp.

Devon Energy is an independent oil and natural gas exploration and production company operating mainly onshore in the U.S. and Canada, with headquarters in Oklahoma.

The company has been focused on increasing production in recent quarters. In the first quarter, it grew its production of barrels of oil 5% from the previous quarter. It also initiated 70 new wells in the quarter and has plotted for U.S. oil production growth of 13-17% for 2017, compared to 2016.

Its drilling for higher-margin oil and the higher commodity prices drove a 59% increase in the company’s revenue from the same quarter of 2016, to $1.3 billion. Net income also totaled $579 million, or $1.08 per diluted share, compared to $3.49 billion in net losses, or $6.44 billion loss per share, in first-quarter 2016. Cost reduction moves also slashed $1 billion in expenses compared to its 2014 high. Devon ended the quarter with $2.1 billion in cash after making $2.5 billion in debt payments, and had $10.38 billion in long-term debt.

Devon Energy stock shed 30.46% year to date. With a 0.86% bump Friday, it closed the day at $31.76 per share.

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