Tuesday, January 20, 2015

Energy investing basics



Recently crude oil price dropped a lot, which presented a very good opportunity for long-term dividend investors, so the focus of many DGIs turned to energy stocks.  However, there are so many energy related stocks, besides the big names such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), what else do you know?  What are their differences?  How do you evaluate their performance?  These are simple questions yet confusing enough for a green hand like me.  Fortunately, I found the series of article from fool.com regarding energy investing 101 and learned a lot from them.  Thus, I make a summary here for future easier reference.

Integrated majors or Big Oil (source here for your detailed study)

These companies deal with the entire value chain of oil and gas: exploration and production, midstream pipelines, refining and chemical production, and retail and marketing.  Here is a list of the 10 largest integrated oil and gas companies that trade on the major US exchanges by market capitalization and production of oil and gas.
Company
Market Capitalization ($Billion)
Total Production (thousand barrels of oil equivalent per day)
% of net income from exploration and production activities
Production mix (liquids/gas as % of production)
ExxonMobil(NYSE: XOM)
$430.3
4,018
85.2
52.6%/47.3%
Chevron(NYSE: CVX)
$236.1
2,585
95
66.8%/33.2%

PetroChina (NYSE: PTR)
$227.8
3,807
106
67.1%/32.9%
Royal Dutch Shell (NYSE: RDS-A)
$225.1
3,262
77
50.6%/49.4%

BP (NYSE: BP)
$147.7
2,259
89
51.9%/48.1%
Total (NYSE: TOT)
$136.7
2,299
78
51%/49%
Petrobras (NYSE: PBR)
$90.0
2,314
172
83.1%/16.9%
Eni (NYSE: E)
$85.8
1,653
124
51.6%/48.3%
Statoil (NYSE: STO)
$75.7
1,852
74
60.3%/39.7%
Occidental Petroleum (NYSE: OXY)
$75.1
767
90
73.4%/26.6%
Above chart also lists out what you should look at when you do research on these companies. Exploration and production are the major activities that all these companies income comes from.
The three P's of research:-
·         Property -- see if a certain locale is a red flag for a company.  
·         Production -- know production mix of each company.
·         Projects -- what does the future hold? (project potential, project risk, and project on-time & budget?)


Refining stocks (source here for your detailed study)

Refining companies transforms crude oil into thousands of different products that we use on an everyday basis.  The most common products you and I know are gasoline and diesel (most valuable ones), but other common products include asphalt and bitumen for paving and construction, organic chemicals for the manufacture of plastics and synthetic fibers, or even waxes and lubricants.  Refiners make their money is to sell all of these products for more than the raw-material costs.

Here is the list of some public companies in the U.S. that are considered refining and marketing specialists:
Company

Complexity
Cost efficiency
Cash conversion
Refining Capacity (in Thousand Barrels of Oil Per Day)
Nelson Complexity Index
Refinery Utilization
Operational Costs Per Barrel of Produced Product
Average Levered Free Cash Flow Margin (Q3 2009-Q3 2013)
Average Return on Capital (Q3 2009-Q3 2013)
Valero (NYSE: VLO)
2,900
11.1
95%
$5.49
1.67%
10.90%
Phillips 66 (NYSE: PSX)
2,200
11.4
93%
$6.64
0.67%
5.70%
Marathon Petroleum (NYSE: MPC)
1,699
11.6
94%
$8.21
1.92%
13.20%
Tesoro (NYSE: TSO)
849
9.5
98%
$7.06
0.78%
8%
PBF Energy (NYSE: PBF)
540
11.3
86%
$6.33
-0.14%
11.90%
HollyFrontier (NYSE: HFC)
443
12.1
95.20%
$6.11
2.41%
9.40%
CVR Refining LP (NYSE: CVRR)
185
11.5
111%
$8.03
2.37%
17.90%
Calumet Specialty Products Partners LP (NASDAQ: CLMT)
180





Western Refining (NYSE: WNR)
151
8.2
100%
$8.86
2.80%
19.30%
Alon USA Energy  (NYSE: ALJ  )
147
9.4
92%
$8.20
1.89%
5.90%
Delek US Holdings (NYSE: DK  )
143
9.2
101%
$6.02
-0.87%
10.50%
Northern Tier Energy LP (NYSE: NTI)
96
11.5
98%
$5.53
1.93%
24.20%


Independent oil & gas stocks (source here for your detailed study)

Unlike integrated oil and gas companies, independents exclusively produce oil and gas. That means no downstream assets like refiners or retail arms. In some ways, it makes them much easier to understand, because you don't have to sift through multiple business segments to identify the primary driver of profitability for the company.  An familiar example is ConcoPhillips (NYSE: COP).

Five key points to consider :-
·         Production potential: Go beyond just proved reserves
·         Reserves to production ratio
·         Reserve replacement costs
·         Production costs vs. production mix
·         Operational cash flow coverage of capital expenditures


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