It's still quite surprising that even more than three years since oil and gas stocks started their 2014 tumble, companies in this industry are still quite cheap. With valuations in so many other industries at or near all-time highs, it looks like oil and gas is one of the few places left to find value investments.
So, we asked three of our investing contributors to each pitch a stock in the oil and gas industry that looks like a good investment this month. Here's a rundown of their picks, Murphy Oil (MUR 0.66%), EOG Resources (EOG 1.07%), and Helmerich & Payne (HP 1.04%).
An under-the-radar global oil player
Sean O'Reilly (Murphy Oil): Almost a year into OPEC's campaign to prop up oil prices via production cuts, there appears to be a light at the end of the tunnel. US crude oil inventories are finally trending down and with recent whispers of continued OPEC production cuts well into next year, October may be just the time to add oil-producing stocks to ones' portfolio. True, should oil prices rise in the years ahead, any and all oil stocks will benefit. But to rest easy at night and set up ones' portfolio for success, investors will need not just any oil stock -- but one with a history of strong operations throughout the recent downturn and the know-how to capitalize on any emerging rebound. It is for these reasons that I submit Murphy Oil as a top oil stock for October.
Despite making its home in El Dorado, Arkansas, Murphy Oil global oil and gas exploration company. Murphy's portfolio consists of both onshore and offshore assets. Its revenues are currently derived from its operations in the US, Canada, and Malaysia. The company continues to add to its sizable reserves via its global exploration activities. With a market capitalization of $4.5 billion, Murphy may appear small compared to bigger cousins like ExxonMobil, but make no mistake, there's nothing minuscule about Murphy's ability to returns for investors.
Like many oil producers, Murphy has not been profitable on a GAAP basis in recent years. In Q2 FY17, for example, it posted a net loss from continuing operations of $17 million, or $0.10 per diluted share. Things improve when we move to the cash flow statement: for the first 6 months of FY 2017, cash from operations totaled $591.4 million. Capital expenditures, money the company spends to find more oil and produce from its current reserves, came in at total $431.6 million. Netting the company, and its investors, a cool $159.8 million in free cash flow (FCF). No wonder the company has been able to keep up its dividend -- currently a juicy 3.85%. With a yield like that and shares at 0.91x tangible book value, Murphy Oil is a fantastic pick for investors this month.
A potential catalyst on the horizon
Matt DiLallo (EOG Resources): Shale giant EOG Resources has a history of unveiling game-changing updates to its reserves and growth outlook in November. Last year, for example, EOG increased its 2020 crude oil growth rate by 5% while also more than doubling its reserve estimate for the Permian Basin, which along with several other catalysts, fueled a double-digit surge in the stock that month. Meanwhile, in November of 2015, the company increased its Delaware Basin net resource potential, and in 2014 it raised its crude oil production growth target for the second time that year.
One area where we might see a November surprise this year is in EOG's exploration program. On last quarter's earnings conference call, CEO Bill Thomas pointed out that the company continues executing a "robust exploration program to capture low-cost acreage in plays that we believe could contain premium-quality rock." Oklahoma is one area we know the company is searching for oil since it recently signed a $400 million deal with a private equity fund to jointly develop its land in Ellis County over the next four years. Given that rivals have found a treasure trove of oil and gas in the state, it will be interesting to see what EOG uncovers. If it has indeed found a new premium drilling play, that revelation could drive the stock higher next month, which makes it a top option to consider buying it in October.
Still room to run in a flat market
Tyler Crowe (Helmerich & Payne): Helmerich & Payne has taken a bit of flack from the market over the past year or so. At first, the concern was that not enough of its rigs were working and that it would impact the bottom line. Then, the narrative became that the company was putting rigs into the field so fast that it was increasing costs and would impact the bottom line. Today, that narrative has changed to the point that the rig count has flattened and there isn't much more incremental growth for the company.
For a company that has managed a 44-year streak of consecutive dividend increases and the best rates of return in the drilling rig business, this is an awful lot of negativity. Sure, costs were higher than normal for the past few quarters, but there was a point when Helmerich & Payne was putting a rig back to work every 52 hours. Getting all those idle rigs back to working condition means higher expenditures, and those costs should come down significantly in the coming quarters.
Also, even though demand for rigs is flat, H&P is still putting more rigs to work, which suggests that it is continuing to take market share from other players. Since the last peak in rig activity in 2014, the company has captured an additional 4.5% of the land rig market, for an overall market share of about 20%. With more available rigs that are capable of handling the complex jobs related to shale drilling, H&P could take even more in the coming quarters.
Even though the company has these things working in its favor, shares of Helmerich & Payne currently trade at 1.3 times tangible book value, well below its historical valuation. Pending some unforeseen collapse of the oil & gas market, shares of Helmerich & Payne look quite attractive.