Oil Stocks: A Real-Time Case Study in Value Investing

Oil Stocks: A Real-Time Case Study in Value Investing

December 11, 2014 Research Insights, Value Investing Research, Uncategorized
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(Last Updated On: January 18, 2017)

I just took a snapshot of the front page of Yahoo Finance, CNBC.com, and Bloomberg.com:

 

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Bloomberg.com @ 1725 EST
cnbc
CNBC.com @ 1725 EST
Yahoo Finance - Business Finance, Stock Market, Quotes, News_2014-12-11_17-20-41
Finance.Yahoo.com @ 1725 EST

WHO WOULD EVER BUY AN OIL STOCK???

Apparently, nobody.

Energy companies as a whole have been blowing up left and right and now sell at a decent discount to the market.

OIL

Oil specific names are getting killed and they are also getting cheap (at least on an enterprise multiple basis).

Of course, cheap things can get a lot cheaper. Nonetheless, the long-term track record of buying cheap stuff is pretty clear (or here).

Here are the Top 10 cheapest energy names that are at least $2B in market cap (many have a large exposure to oil):

Ticker Name EBIT/TEV Yield Percentile Cheapness Rank
PBF US Equity PBF ENERGY INC-CLASS A 22.26% 99.90%
VLO US Equity VALERO ENERGY CORP 20.98% 99.80%
RIG US Equity TRANSOCEAN LTD 18.16% 99.70%
SM US Equity SM ENERGY CO 17.22% 99.50%
OIS US Equity OIL STATES INTERNATIONAL INC 16.72% 99.40%
HP US Equity HELMERICH & PAYNE 16.29% 99.20%
IOC US Equity INTEROIL CORP 15.61% 98.70%
WNR US Equity WESTERN REFINING INC 14.85% 98.10%
OXY US Equity OCCIDENTAL PETROLEUM CORP 14.17% 97.70%
NOV US Equity NATIONAL OILWELL VARCO INC 14.13% 97.70%

If you’re a value investor, this should be exciting–not scary…


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • Die Mondsichelfee

    Thank you for giving us some valuation insights on this hot topic!

    One question: When you calculate EBIT/TEV, do you take the last published EBIT? Isn’t that EBIT kind of outdated because it might be based on a much higher oil price? Wouldn’t it actually be better to calculate what the EBIT for the respective company would be when the oil price is about $ 60?

    Thanks in advance!

  • Jack Vogel, PhD

    We used trailing 12 months. Trying to calculate future EBIT is a great idea. However, in our paper here (http://csinvesting.org/wp-content/uploads/2012/09/tev-to-ebitda-research.pdf), we find that forward looking estimates do not work very well. So we do not attempt to estimate future EBIT.

  • CalcRisk

    Thanks for an excellent and timely post. I have a quick question on the data – looking at Valero’s financial data, I have: TEV – 2,245.8, LTM EBIT – 48.9 => EBIT/TEV = 2.31%.

    Is my data bad or am I missing something?

  • Jack Vogel, PhD

    Here is what we have: EBIT = 5667, TEV = 28428.7, EBIT/TEV=19.93%

    TEV moved up since this post (12/11/14) as the stock price appreciated. It looks like your EBIT number was off by a factor of 10.

  • jimhsu

    We just witnessed the example of “cheap getting cheaper” this month with the recent move in oil. Such is value.

    Probably though, the single most hated sector right now is not oil, not gold, but coal mining. After thinking for a while, I literally can’t think of a single bullish scenario for coal, given recent actions (both market-oriented and policy-driven), especially given its 5th straight down year right now. Knowing my behavioral biases, this should be a positive thing.