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The Market's View on Oil

by: The Moneygardener August 15, 2008 | about stocks: BP / COP / COSWF.PK / CVX / DVN / HUSKF.PK / PCZ / XOM    

The Moneygardener

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The general rule when buying and selling energy and commodity names is the reverse to other stocks; "buy when P/E ratios are high and sell when P/E ratios are low". This strategy would work like a charm right now, if and only if the energy and commodity bull market is coming to a close. That is, the cycle is turning and these things will come crashing down without touching the sides. You want to be selling when earnings have grown so high that when they're compared with the stock price they produce a very low P/E ratio.

Keeping with the theme of 'is oil dropping to $60/barrel?' Here are some of the Price to Earnings (P/E) ratios and yields that the market is currently offering for these names:

Petro Canada (PCZ) - P/E= 5.8, Yield = 1.7%
Conoco Phillips (COP) - P/E= 7.5, Yield = 2.4%
Exxon Mobil (XOM) - P/E= 9.5, Yield= 2.1%
Husky Energy (HUSKF.PK) - P/E= 9.4, Yield = 4.4%
Canadian Oil Sands Trust (COSWF.PK) - P/E= 14.0, Yield = 10.3%
Chevron Corp. (CVX) - P/E= 9.2, Yield = 3.0%
BP PLC (BP) - P/E = 9.1, Yield = 5.7%
Devon Energy (DVN) - P/E= 9.9, Yield = 0.7%

These things are all trading as if their earnings growth is done. They are likely all pricing in earnings growth of less than 6% going forward (at most). In the face of production that is becoming more and more difficult to grow, their futures likely depend on the price of oil. Where is it headed?

See this Conoco Phillips chart as an example:

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This article has 11 comments:

  •  
    Aug 15 09:29 PM
    What is the EPS range for your list? What PE did the market assign when oil was 85 in January and what was the PE when oil was 147? How does that range compare with today's price of 112? If the PE range is tight, and it is, then how does that affect your theory?

    DVN is primarily a natural gas producer with expanding production. They have a forward PE of barely 6 today. When crude was 147 and natgas was nearly 14, their forward PE was about 7.5. You use a trailing PE of 10. That's not much difference.

    A better hypothesis is that the market does not like energy shares and always assigns very low multiples. That's why many of the big energy companies are buying back their own shares.

    Analysts estimate that DVN will make 12 dollars per share this year and 14 in '09. Assign any double digit PE you like and you get a price higher than the current one.

    Reply
  •  
    Aug 15 10:02 PM
    I don't buy the premise that oil is going to $60 hence I still own PCZ, COSWF, CVX, and DVN. Even if oil does hit $60 I am holding and buying these stocks at current prices or below. PCZ, COSWF, and DVN should be able to grow production and earnings.
    Reply
  •  
    Aug 16 10:37 AM
    I don't care what the "Techno Weiners" of this world say. Put them in a boat and set them adrift along with AIG, Lehman, Morgan Staney and the rest of the Wall Street nut cases.
    Reply
  •  
    Aug 16 11:33 AM
    Oil is not going to $60. Think, people... what season are we coming up on? People in Florida, Texas and California may have summer all year, but the majority of us have winter. We need heat. We drive all year, and we need snow plows (therefore more fuel used). Oil may be going down now, but soon...

    Besides, there are two different views: Supply/Demand says the supply is exhausted soon, and demand needs to follow (oil prices go up) or Infinite Oil (which means there's plenty of time for you to get in). And if you really think it's the speculators, and that oil is about to tank completely, then you might want to examine your IRA to see just what your advisors have invested in... you will be surprised.
    Reply
  •  
    Aug 16 11:40 AM
    Everything that goes up may come down. The idea that oil will come to $60 per barrel misses some factors. Normally and historically as oil prices come off historic highs oil consumption increase. The current prices have slowed consumption but it will come back as the warm season closes and the games in Beijing come to an end.
    Reply
  •  
    Aug 16 02:54 PM
    All of the pikers came out after Oil made normal correction just as any asset class,I wonder if you ever traded a single futures contract or bought your stocks you are expert on when they were trading at high P/E 5 years ago.
    Don't write stupid articles if you don't understand the current geopolitical situation wher America finishes soon it's oil/gas resources and only option it has it is to attack Iran to take those people Oil like your government together with Jews did in Iraq.
    Waste of time...
    Reply
  •  
    Aug 16 03:09 PM
    There are good candidates which reward the hold and promise some appreciation. I do feel that energy will rise over the next decade and consequently will keep up with inflation, then when the deflation hits, the dividends will look good. I will be short, but I always hold some dividend stocks as a core.
    Reply
  •  
    Aug 16 04:01 PM
    Although $147 oil was clearly a hot-money bubble, there is a real and growing supply-demand problem. My guess is that the producers are going to cut back at around $100 and you won't see much below that. Economic weakness may hold oil down for a while, but in the not-to-long term, energy has nowhere to go but up.
    Reply
  •  
    Aug 16 06:20 PM
    A month and a half back, T. Boone said oil would reach $150 before it reached $100. And he seemed to think the $150 would be "before the end of the year".

    Maybe oil goes to $30 as one gentleman wrote yesterday.......and maybe all our cars will run on moonbeams.

    Meanwhile, Pelosi sabotages all attempts at American energy independence.
    So I will stick with T. Boone until the string runs out.
    Reply
  •  
    Aug 17 12:29 PM
    Im buying PCZ right now from the mid to low 40's. Earnings this Q should be down due to lower oil prices also thier edmonton refinery is on a 6-8 week shutdown to bring online thier refinery conversion plant which has just finished completion. I hope PCZ can fall to 40 on fear of bad earnings. Will make for a great buying oportunity. Also to take into consideration ,New tax policy introduced in 2009 by the alberta government.
    Reply
  •  
    Aug 17 02:36 PM
    244491 nice to know that you are free to put in your comments, try doing that in one of the middle eastern countries you seem to rather be in. How does the market work there?
    Reply
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