The price of crude oil is at a six-year low, and big oil stocks like ConocoPhillips and Total SA (ADR) are finally cheap enough to consider nibbling. That’s what Citigroup analyst Alastair Syme told clients in a briefing. This was Citi’s first bullish assessment of energy stocks since the start of 2011.
Markets in the Grip of Fear
Fresh concerns about the state of the Chinese economy are causing a rout in equity markets around the globe, with last week’s sell-off in the Dow Jones Industrial Average definitely turning the trend down, at least for the medium-term.
The chaos is likely to carry-over to the current week, with most traders in sheer disbelief to let any sense of reason return to the markets. However, history has repeatedly shown that successful investor’s bottom feed from these very panic sellers, to reap superior returns when the market reverts to mean. As Warren Buffet once famously said, “Be fearful when others are greedy, and greedy when others are fearful.”
ConocoPhillips and Total SA (ADR) provide too such opportunities in a market that is devoid of too many buy ideas.
ConocoPhillips Offers Value
Just in the month of August, Brent crude is down close to 16 percent, while U.S. crude has tumbled more than 17 percent. Such a free-fall in the market has changed the dynamics of the sector, and has presented with some interesting buying opportunities, according to the Citi team.
The note to investors said that the oil and gas space now trades at 1.2 times price-to-book, which is below the last two trough valuations, recorded in the first quarter of 2009 and fourth quarter of 1998.
Over-supply is rampant is the oil market, pushing prices closer and closer to “cash costs.” But that scenario is not stable because prices cannot stay at costs forever. Syme forecasts oil to eventually recover to its marginal incentive price in the range of $65 to $75/bbl. He further recommends buying energy stocks when oil is trading near costs, because the downside risk is low from current levels.
The report further outlines a roadmap for these energy firms to get back to profitability. “Cost-cutting and capital discipline proved successful strategies in the mid-80s and late-90s down-cycle, and we see no reason why they will not do so again.
This will be a multiyear process that involves both driving behavioural changes within the companies as well as taking advantage of a global supply-chain where overcapacity should allow for deflation. We see this mix of the road map back as 20 percent cost-cutting, 40 percent growth (enjoying the benefits of 2010-14 investment and now making better reinvestment choices) and 40 percent price.”
Citigroup’s preferred stocks in the sector are those that are taking the aggressive initiative to adjust to the prevailing supply glut. The firm’s top two U.S.-listed stock picks include, ConocoPhillips and Total SA (ADR) . As for Chevron and ExxonMobil, Syme and his team have left them with a “neutral” rating.
Shares of ConocoPhillips closed Friday at $45.39, while Total SA (ADR) (NYSE:TOT) dipped 1.6 percent to $46.23.
Just a word of caution for investors brave enough to consider buying into the sector. Since markets are in a free-fall right now, construct your portfolio by gradually buying into ConocoPhillips and Total SA (ADR) at every major dip.
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