Thursday, October 13, 2011

Oil Stocks are Undervalued

I Have been loading up on oil stocks lately because of record low valuations. Oil companies are a screaming buy right now. so cheap that the Chinese are willing to pay more than double the share price for Daylight Energy. 

from CIBC  analyst 
We view the sector's risk/reward as extremely compelling. The large caps
are only 13% off their lows reached in the 2008/09 financial crisis and the
sector is discounting only ~US$70/Bbl oil LT. Our top large-cap picks are
Summary on Suncor: 
 Suncor Energy Inc. (SO–$46.00 Target): Our top pick remains Suncor, which we believe is one of the best-positioned companies against downside commodity risk. We believe the stock has far more defensive elements than the market gives it credit for (most FCF generation and one of the best balance sheets at US$70/Bbl) yet it has been among the worst performers during the recent downturn. Even with the sell-off in oil prices, Suncor is being well supported by high Brent and SCO premiums and exceptionally strong downstream results. Given the company’s operational momentum throughout Q3, we should see record CFPS from the company this quarter. Furthermore, following the recent completion of its major turnaround in the oil sands in Q2, we believe the company is now poised for ~18 months of relatively uninterrupted operations.
Summary on Talisman
Talisman Energy Inc. (SO–US$23.00 Target): In our view, Talisman is better situated now than at any time in the past five-plus years, as the company can lay claim to a well-defined unconventional gas portfolio and is demonstrating substantial and sustainable growth. Additionally, Talisman brings a compelling mix of highimpact exploration that could further extend those five-plus years of international growth visibility. Although Talisman does not have the same defensive characteristics as Suncor in the US$70/Bbl case, we note that even if it did have to cut capex by ~$500 million from our current forecasts, we would still expect ~9% of growth next year – one of the highest growth rates in our group. Additionally, we note that its balance sheet remains very strong even at the US$70/Bbl level. Talisman is also one of the least expensive on P/NAV metric – trading at only 42% of risked NAV. Furthermore, Talisman offers more exploration catalyst potential than any other Canadian large cap, in our opinion, which will be the defining factor for the stock’s performance in Q4/11. The company has high-impact wells planned for offshore Indonesia (South Makassar Strait) and Kurdistan but it is Colombia that most interests us given the lower risk, large size and relatively short cycle times.

1 comment:

  1. My strategy is buying cyclical stocks when a sector is undervalued, so last month for example I picked up some TCW.T and HAL.N which are oil services companies. Their focused exposure to the industry allows their shares to have a higher beta, and climb faster than more defensive stocks.
    However, once valuations for oil companies revert back to the mean I will sell and replace those stocks with less volatile, diversified companies like CNQ.T, or integrated companies like SU.T (which, besides pumping oil, also runs a retail/distribution business,) so its stock is less influenced by oil prices or geo political problems. But I completely agree with the above analyst and SU.T is one of my core holdings already.