I've generally liked what I've heard from Paul Sankey when I hear him on TV or the radio, so I'm willing to give his call here a shot.
Barrons: Big Oil May Heat Up Again This Winter.
Deutsche Bank Securities
60 Wall St.
New York, NY 10005
(Tel) (212) 469-5000
WE PREDICTED UNDER-PERFORMANCE and got a stampede for the door. A vicious rotation made our prediction of a 10% fall in integrated oils between October 1st and December 5th come roaring home in a flat month.
This October just passed was the worst October for integrated-oil stocks performance since "Black" October 1987. If you are feeling a little beaten up, you should be – the stocks fell 8% in a month, with the overall oil group losing around $100 billion of value.
Now we are likely to drift until snow arrives, at which point we expect a ripping performance from the oils into the January fourth quarter earnings-per-share reports.
After a third quarter which saw no impact on our earnings-per-share numbers for 2006 for any name, we have revisited valuations and investment cases.
Particularly, in this note we highlight net asset values (NAVs) that are in line with current equity valuations. That is, the integrated oils are now trading in line with break up value. Corporate raiders should take note. More simply put, the group is discounting $36 oil against a $60 strip. Buy.
Some of the fundamental reasons that the oils sold off:
1) Concern that we highlighted on the arrival of Hurricane Katrina, that high prices would destroy the demand driver which has been the essence of the oil bull call. The international demand case may well be more important, and anyway we are modeling weak demand in our bullish outlook. We only look for 0.5% gasoline demand growth next year, suggesting 1% gross domestic product growth.
2) Windfall taxes that would take away excess profit if demand does not collapse. We do not see windfall taxes as likely although pressure will remain. Watch for a hearing next week called by Senator Frist.
3) Rotation from an oil group, which was up 40% year-to-date with the market, is down 7% by the start of October. The snowball of money leaving the sector has now bottomed out. Major oil stocks are at or around their break-up value. Chevron, ConocoPhillips, Marathon and Hess are now all potentially worth more broken up – trading at or below NAV. We recommend investors buy these under- valued names before the first snow of winter.
Nearly 70 degree weather in New York should continue to pressure the commodity for the next fortnight. Arguably the equities have predicted this move already. We are raising Hess and Marathon to Buy as we expect 20% gains in the next 12 months for the integrated oil group.
Top picks are Occidental Petroleum, ExxonMobil, and ConocoPhillips. These are the names with the highest leverage to high oil prices (yes, ExxonMobil) and best managements.
-- Paul Sankey
Barrons: Big Oil May Heat Up Again This Winter.
Deutsche Bank Securities
60 Wall St.
New York, NY 10005
(Tel) (212) 469-5000
WE PREDICTED UNDER-PERFORMANCE and got a stampede for the door. A vicious rotation made our prediction of a 10% fall in integrated oils between October 1st and December 5th come roaring home in a flat month.
This October just passed was the worst October for integrated-oil stocks performance since "Black" October 1987. If you are feeling a little beaten up, you should be – the stocks fell 8% in a month, with the overall oil group losing around $100 billion of value.
Now we are likely to drift until snow arrives, at which point we expect a ripping performance from the oils into the January fourth quarter earnings-per-share reports.
After a third quarter which saw no impact on our earnings-per-share numbers for 2006 for any name, we have revisited valuations and investment cases.
Particularly, in this note we highlight net asset values (NAVs) that are in line with current equity valuations. That is, the integrated oils are now trading in line with break up value. Corporate raiders should take note. More simply put, the group is discounting $36 oil against a $60 strip. Buy.
Some of the fundamental reasons that the oils sold off:
1) Concern that we highlighted on the arrival of Hurricane Katrina, that high prices would destroy the demand driver which has been the essence of the oil bull call. The international demand case may well be more important, and anyway we are modeling weak demand in our bullish outlook. We only look for 0.5% gasoline demand growth next year, suggesting 1% gross domestic product growth.
2) Windfall taxes that would take away excess profit if demand does not collapse. We do not see windfall taxes as likely although pressure will remain. Watch for a hearing next week called by Senator Frist.
3) Rotation from an oil group, which was up 40% year-to-date with the market, is down 7% by the start of October. The snowball of money leaving the sector has now bottomed out. Major oil stocks are at or around their break-up value. Chevron, ConocoPhillips, Marathon and Hess are now all potentially worth more broken up – trading at or below NAV. We recommend investors buy these under- valued names before the first snow of winter.
Nearly 70 degree weather in New York should continue to pressure the commodity for the next fortnight. Arguably the equities have predicted this move already. We are raising Hess and Marathon to Buy as we expect 20% gains in the next 12 months for the integrated oil group.
Top picks are Occidental Petroleum, ExxonMobil, and ConocoPhillips. These are the names with the highest leverage to high oil prices (yes, ExxonMobil) and best managements.
-- Paul Sankey
