Energy stock rankings (Oct 2014)

I find that ranking stocks is a useful analytical tool.  Ranking stocks against each other helps me be more realistic about how good or how bad a stock is.

I have some extreme and unconventional viewpoints.  Many “value investors” would have a list that would be the opposite of mine.  Many of the stocks I have shorted have been mentioned on ValueInvestorsClub.com as longs or potential longs.  Many of these people are quite intelligent and eloquent.  In my opinion, the longs do not understand how they are being bamboozled and misled by stock promoters.  I’ve written about this many times on this blog (e.g. “How would a sociopath fleece investors in oil and gas?” and “Beating Wall Street in oil and gas“).

While the independent E&P sector has seen a meltdown in share prices, I don’t see undervaluation.  The problem is that many of the companies continue to be run by stock promoters and charlatans (more so in the small caps than the large caps).  Until the management teams get better, I don’t think that the independent E&P space will be a good place to look for longs.  My prediction is that there will be more pain to come when NGL prices collapse.

This year I have done well in energy stocks because I made money going long KMI warrants (I sold most of them after the merger announcement) and had great returns on the short side.

Without further ado, here are my rankings:

Grade A

KMI – For analysis, see my posts tagged Kinder Morgan.

Grade B

SPY – Because I think that only a handful of stocks will make the majority of the profits in the long-term, there aren’t a lot of stocks that I rank highly.  There is only one stock in this list that I’d rather own over the S&P 500 index.

XOM – Management is very conventional.  They won’t do anything brilliant or awful.  Their shareholder communications could be better.  By pointing out high returns on equity, management is taking credit for higher commodity prices.  Management should use metrics that reflect how well they are operating the business.  They should focus on the process rather than luck-driven results.

SWN

Grade C

Stuff cash in a mattress.  0% yield.

MCF – The new management team has no respect for the late Ken Peak.  They removed his excellent presentations from the contango.com website… possibly because Peak’s ideas disagree with current management’s strategy.
Unfortunately, because Contango is heavily invested in natural gas, I think that the company will be hurt by macro factors outlined in my post “Thoughts on oil and gas (Oct 2014)“.

TOT – Total has done a lot of dopey deals with Interoil, Genie Energy, and Aubrey McClendon.  Bad management.

Grade C-

MEG.TO – They are a very high cost producer because their technology (steam-assisted bitumen extraction) is inherently high cost.  The company is barely throwing out positive cash flow.

CHK (Chesapeake) – In my opinion, this stock has been overrated by the value investing community.  On the reserve estimation side pay attention to well life, the b-factor + dmin assumptions, and behind-pipe reserves.  I’ve written about Chesapeake in the past; see my posts tagged CHK.

GNE (Genie Energy) – This science project is dopey.  In-situ steam-assisted shale extraction will be very high on the cost curve.  The current methods for extracting hydrocarbons work fine. There’s a lot of hydrocarbons that can be extracted this way before we have to turn to higher cost methods.

Grade D+

ACMP – Bad cash flow.  Their cash flows will decline unless E&P companies drill more wells that connect to their gathering systems.  See my previous posts tagged ACMP for analysis.

TGA – The key risk to this company is political risk given that it has assets in Yemen and Egypt.  Yemen has a civil war.  Egypt is currently holding onto the company’s profits.  If Egypt did not do this, TransGlobe would be a highly profitable company with strong cash flow.  However, it is unclear whether or not TransGlobe will actually realize any profits from its Egyptian operations because Egyptian politicians may decide to keep all the profits.  That the Egyptian government needs to borrow/steal from foreigners suggests that the country is on the verge of a financial meltdown.
EDIT (12/1/2014): I think I misread the political situation in Egypt entirely.  See my edited post on the situation in Egypt.

SD

IOC – I haven’t done much research on this company.  It may or may not deserve a different rating.

Grade D

REXX – See my writeup.

GDP

Grade D-

TPLM

MPET

EOX

TENG

GST

LINE

GLRI

Grade F

MILL – See my writeup on this company.

MHR – See my writeup on this company.

*Disclosure: 
Long KMI and XOM (call options).
Short ACMP, TPLM, MPET, EOX, TENG, GST, MILL, MHR.

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2 thoughts on “Energy stock rankings (Oct 2014)

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