Technology Has Its Downfalls $APA $CHK $DVN $EOG $EPD $RDS.A
Before you make that investment you might want to take a look at how your next target spends its money on technology and working to increase capacity. When talking about the newest technology it can be untested and not workout the way they were planning. Just because it is new doesn’t mean its better.
Dreams of return on equity can turn into nightmares when excessive capital expenditures or new technologies expand production capacity and compete away potential profits. Unfortunately, myriad new technologies and expanding capacity are cause for energy investors to lose sleep.
Malinvestment and Overcapacity
Remember the cries of “peak oil” from energy bulls? Speculation in the 2008 commodity bubble provided substantial funding for new drilling projects and investment in new energy technologies. This funding catalyzed the rise of natural gas fracturing, the long-term of threat of renewables, and unexpected new challengers.
Seaborne liquefied natural gas plants are emerging as a new threat to energy sector profitability. The largest LNG producers in the world, led by Royal Dutch Shell (RDS.A), have figured out how to move their processing plants to floating barges so they can tap into remote underwater fields. Shell has plans to build a floating LNG plant in South Korea by year end 2012. This will be the world’s biggest floating LNG plant, and will weigh six times more than the largest aircraft carrier. About 5,000 workers are expected to build this vessel, and it is expected to cost about $13 billion.
Independent oil and gas companies must trade at cheap price multiples to compensate investors for the threat of increased supply and lower energy prices. For example, Apache (APA) is attractively priced at $87 per share. The firm’s 1.98 price-to-sales ratio is in line with today’s prevailing market multiples. Apache shares are trading at an attractive 10.37 price-to-earnings ratio, lower than the 14.1 average of the S&P 500 index. The price-to-book multiple of this stock is 1.1, cheaper than the 2.05 S&P 500 average. The firm’s reasonable 0.33 debt-to-equity ratio demonstrates that the firm is not overleveraged. After this year’s broad market rally, investors might enjoy purchasing Apache since it is actually down 3.9% over the past year.
An even steeper 11.2% decline in price over the past year has made Chesapeake Energy (CHK) an even more attractive buy at $20 per share. This stock’s 1.04 price-to sales ratio is significantly less than the 1.29 average of the S&P 500. Chesapeake shares are trading at a bargain 6.43 price-to-earnings ratio, less than half the 14.1 average price-to-earnings ratio of the S&P 500 index. The stock trades at a discount to the accounting value of its net assets with a 0.74 price-to-book multiple. Analysts expect that the firm’s earnings growth will accelerate with five-year estimates at 7.8% per year, considerably faster than -11.8% annualized earnings growth over the past five years. The 1.79% dividend yield of the stock is comparable to the 1.64% 10-year treasury yield. Future dividend payments are likely because the company pays out 0.11 of earnings as dividends, so earnings could drop considerably before dividends must be cut.
Shares of Devon Energy (DVN) are not trading low enough at $62 to compensate investors for this risk. The shareholders of this independent oil and gas industry large cap stock have seen a 0.3% rise in price over the past year. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 2.24 ratio. Devon shares are trading at an attractive 10.33 price-to-earnings ratio and a price-to-book multiple of 1.12, both of which are below the S&P 500 average.
The threat of a supply glut has not been priced into the shares of all energy companies. Shares of EOG Resources (EOG) are not trading low enough at $115 to compensate investors for this risk. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 2.73 ratio. EOG shares currently trade at a high 22.49 price-to-earnings ratio, a higher value than the 14.1 average of the S&P 500 index. Shares trade at a 2.33 price-to-book ratio which is near the 2.05 S&P 500 average.
A 21.7% jump in price over the past year has left Enterprise Products Partners (EPD) stock too expensive for investors. At $54.40 this independent oil and gas industry large cap stock trades at a high 19.86 price-to-earnings ratio. Moreover, the 3.93 price-to-book multiple of this stock is higher than the 2.05 S&P 500 price-to-book ratio. Investors would be better off investing in an S&P 500 index fund.
This is not an offer to buy or sell securities. Oil investment carries with it very high risks. The information contained within this site has not been nor will it be verified by Envestor First and is subject to change at any time. We are not a United States Securities Dealer or Broker or United States Investment Adviser. Do your own due diligence and consult with a licensed professional before making any investment decisions. Please read our full disclaimer before making any decisions.