Chevron (CVX) And Exxon (XOM) The Top Large-cap Oil And Gas Picks; Societe Generale Analyst Covers The Market And Identifies His Top Stocks
February 1, 2012 - The Wall Street Transcript has just published Oil & Gas: Refining, Independent and Major Integrated Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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John P. Herrlin Jr. was hired by Societe Generale Corporate & Investment Banking to head its oil and gas equity research in the U.S., where he will cover U.S. integrated energy companies as well as North American independents (E&Ps). He will be based in New York. With the launch of its U.S. equity research coverage of the oil and gas industry, Societe Generale Corporate & Investment Banking now offers its global investor clients a full complement of first-rate energy research, ranging from the bank's leading European energy company coverage as well as Societe Generale Corporate & Investment Banking's oil commodity research which was ranked number one by Risk magazine in 2009. Mr. Herrlin has an undergraduate degree in geology from The University of Montana, conducted graduate studies in geology from the University of Montana and Colorado School of Mines, and he earned an MBA in finance and energy management from the University of Denver.
TWST: All things considered, what are your top two or maybe even three picks at the moment?
Mr. Herrlin: On the IOC side, Chevron and Exxon have been our large-cap top picks. In the case of Exxon, many question the acquisition of XTO and XOM's operating strategy. Both XOM and XTO functioned upstream as some of the best engineering executers when it comes to development projects, and we believe that XOM bought XTO more for the people, so they could pursue global shale programs, than a means to providing volume growth. XOM, in our view, doesn't focus on short-term metrics, but the long term. Most analysts, ourselves included, have embraced Chevron because of its large global deepwater program - Australia, GOM, West Africa and Brazil - that is now reaching fruition. CVX has differential volume growth, above-average exposure to Asia, and larger oil exposure and a good dividend yield. The smaller IOC that we like, which is oil leveraged, is HES. Hess has gone from being more of a global exploiter to now being an explorer/exploiter.
They've acquired companies and acreage in the Bakken of North Dakota, the Utica Shale of Ohio and Eagle Ford formation. I think that one has been oversold. It's oil levered at 70%, so that one's attractive.On the E&P side, we have a long list. In general, companies tend to have an oil leverage, good balance sheets and in some cases, exploration exposure. I'll only give you four, but we have a long list. Anadarko has now settled its problems with BP (BP). A year ago, I rated APC a "sell;" now it's a "buy." I started out my coverage at SG saying that APC could have to pay BP, and they did. Now that's out of the way, and we like APC's operations, even though we believe the Tronox suit could cost APC another billion. Why like APC? It's a large-cap E&P that is exploring and providing differential value in the GOM, Lucius and Caesar Tonga; in Ghana, Jubilee; and in Mozambique with its Barquentine with 15-30 Tcf of recoverable reserves - APC 36.5% WI. In the U.S. onshore, the Street may not fully embrace APC's Niobrara or Utica potential. APC has always sought the big "E," exploration, and that creates added shareholder NAV which offsets above average N.A. natural gas production exposure. Apache is an acquirer/exploiter/explorer.
They've never had as high a P/DCFPS multiple as Anadarko, but this is an E&P that generates consistent investment returns and volume growth. I think it has been penalized excessively for Egypt, which accounts for 20% of its output. APA continues to get paid in that country. Globally, APA has one of the best conventional footprints, and it has a very interesting unconventional program, for which APA gets little credit. Longer term, we like APA's Wolfcamp exposure in the Permian and shale gas/oil potential in Argentina, shale/LNG potential in Canadian Kitimat and Australian LNG.
The last U.S. large cap I'll mention is Noble Energy. Noble is a natural-gas-levered company within North America, but they're involved with oil projects in the Deep H2O Gulf of Mexico, the Niobrara of the DJ Basin of Colorado and in Equatorial Guinea in the Deep H2O. Internationally, they've found large-scale natural gas reserves, which sell more on an oil equivalent price basis in Mediterranean offshore Israel and more recently Cyprus.Other U.S. companies we could have mentioned would have been our remaining "buys:" Occidental Petroleum, the largest free cash flow generator; Devon Energy, balance operations with growing SAGD output in Canada; Murphy Oil, an oil-leveraged international wildcatter; Marathon Petroleum, an oil-leveraged acquirer/explorer.
In the midcaps, Forest Oil, which has been penalized for guiding down and being fiscally conservative, and Newfield Exploration, which is switching liquids focus to the Uinta basin from the Williston, which makes sense. And a small cap, Kosmos is a rank wildcatter with current production in Ghana and an interesting international portfolio in Ghana, Cameroon, Morocco and Suriname. North of the 49th parallel, we continue to like Canadian Natural Resources, which is 65%-plus oil leveraged E&P with about 500 million barrels of unbooked heavy resources and a large bitumen mining project called Horizon. It's one of the biggest E&Ps in Canada. We've modeled CNQ to generate $1 billion in free cash flow next year.
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