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This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we investigate multiple analyst moves in the oil sector, as analysts at UBS and Global Hunter Securities pick winners and losers in the refining and transport industry.
A dozen oil companies you've never heard of
For nearly half a year, oil refiners on the Gulf Coast have cried foul over a major distortion in the oil market. With their major pipeline to the Midwest flowing only one way -- north -- refiners had no way to get access to low-priced crude oil that was pooling in storage tanks in Cushing, Okla.
Lacking pipes to send oil south, a bottleneck had formed in Cushing, which was getting flooded with new oil supply from Canada and North Dakota. Refiners fortuitously located close to the pent-up crude (such as Valero (NYSE: VLO ) ) were able to buy oil at low prices and earn strong margins refining it. Refiners farther away were missing out. They had to practice their refining magic on higher-priced Brent crude, a form of oil that cost upward of $15 a barrel more than the sweet, light West Texas Intermediate (WTI) grade that was trapped in Cushing.
That all changed this morning, when news broke that a planned reversal of "flow" of the Seaway pipeline, run by Enbridge (NYSE: EEP ) and Enterprise Products Partners (NYSE: EPD ) , was moving faster than anticipated. Basically, what this means is that oil that was flowing north to oil-soaked Cushing will stop, and beginning in late May, the pipeline will instead begin siphoning 150,000 barrels a day south to where refiners can make good use of it. As capacity expands to 400,000 b.p.d. early next year, WTI prices will rise, Brent prices will fall, and the two flavors of oil will begin trading for something closer to an identical price.
This news sparked a rash of new buy ratings from oil analyst Global Hunter Securities, which now advises investors to "buy" shares of Enbridge, "accumulate" shares of Enterprise Products (though how you do that without buying them, is anyone's guess), and get increasingly aggressive in purchasing shares of any number of pipeline operations -- everyone from Crosstex Energy to Western Gas Partners (NYSE: WES ) .
The catch? While Seaway's early reversal of flow is a bit of a surprise, the fact that a reversal was coming has been pretty widely anticipated for quite some time. Most of the companies Global Hunter is now recommending already sport above-market price-to-earnings ratios: 20 times forward earnings for Enterprise Products and Enbridge, for example, 21 times for Western Gas, and an incredible 67 times earnings for Crosstex. If you decide to follow Global Hunter's advice and buy, the stocks' generous dividend payouts may not be enough to make up for the high sticker prices you'll be asked to pay.
And one more that you have heard of
A smarter way to play the Seaway news may be to ignore it entirely; pay no attention to the stocks that have the Street excited today, and instead look at the ones they hate. For example, UBS just reiterated its "sell" rating on ConocoPhillips (NYSE: COP ) , citing worries over the company's ability to grow reserves, and a need to increase capital spending among its concerns. But at the same time, UBS raised its target price on the stock to $64 a share.
Even that target looks pessimistic, though. Consider: At today's share price of $74-and-change, Conoco sells for a lowly 8.3 P/E ratio. Yet the stock is expected to grow its earnings at 5% per year going forward, and pays a 3.6% dividend yield (which itself is a mere fraction of annual profits, and so could be increased with ease).
Between its generous dividend yield and respectable growth prospects, Conoco now looks like a better bargain than any of the Seaway-related plays Global Hunter is recommending.
Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners, but Motley Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. The Motley Fool has a disclosure policy.