No free lunch: Quality comes with a high price tag
Anadarko Petroleum Corporation (NYSE:APC) is one of the largest independent oil and gas companies engaged in the E&P of natural gas, crude oil, and natural-gas liquids. Anadarko Petroleum Corporation (NYSE:APC) operates mainly in North America, Algeria, Venezuela and Qatar. The company has approximately 2.6 billion barrels of oil equivalent (bboe) of proved reserves and more than 740 million barrels of oil equivalent (mboed) worth of production.
Anadarko Petroleum Corporation (NYSE:APC) is ameliorating its performance steadily. The company’s adjusted 1Q 2013 earnings were 16% above consensus, up 18% year-over-year and 19% sequentially. Earnings benefited from increased production, lower unit costs, and higher realized prices. The company’s continued growth in US unconventional resources has been lifting production steadily and, hence, earnings.
Financially, Anadarko Petroleum Corporation (NYSE:APC) is also performing very well. Its net debt ratio fell to 31%, from 33% at the end of last year. All of the above being said, the company trades at a relatively expensive level. At 2013 17x P/E and 6x P/CF, Anadarko Petroleum Corporation (NYSE:APC) is a great company trading at a very well-deserved premium to its peer group. I would buy it, if it was cheaper.
Successful asset diversification in progress but a bit too expensive.
Noble Energy, Inc. (NYSE:NBL)‘s main domestic operations are located in the Gulf of Mexico and in the Rockies. Besides this, Noble has relevant international investments in Israel, where huge offshore-gas projects such as the Leviathan field are located.
The first thing we should note when taking a look at Noble Energy, Inc. (NYSE:NBL) is that the company continues to make good progress diversifying its asset portfolio and growing its reserves and production with an increased focus on oil and liquids. As a matter of fact, results are coming in better than what’s expected by most analysts.
For the first quarter, Noble Energy, Inc. (NYSE:NBL)’s adjusted earnings were 21% above consensus thanks to better-than-expected volumes and lower-than-expected costs and expenses. Earnings, however, declined 15% year-over-year and 10% sequentially on lower realized prices and lower volumes. Nevertheless, the company keeps on generating great amounts of cash. Noble Energy, Inc. (NYSE:NBL) should generate operating cash flow of approximately $3.2 billion this year and is expected to increase that number by 12% in 2014.
Having raised its quarterly dividend by 12% to $0.28 per share, Noble Energy, Inc. (NYSE:NBL) pays a 0.9% dividend yield and trades at 2013 17x P/E and 6.5x P/CF. Those multiples are a significant (I believe unjustified) premium to its peer group. Within this group of three companies, I think Noble is the least compelling alternative at the current market prices.
My top pick: Cheap valuation and huge potential growth.
Murphy Oil Corporation (NYSE:MUR) is a worldwide oil and gas E&P company with retail marketing operations in the US and the UK. With 600 mmboe of proved reserve and 200 mboed of production, it’s my favorite pick among this group of three large–capitalization E&P corporations.
For the first quarter of this year, Murphy Oil Corporation (NYSE:MUR) continued to show improved performance. Its adjusted 1Q 2013 earnings were $208 million, or 11% above consensus. EPS declined by 27% year-over-year and 48% sequentially, but the reasons for the decline in EPS — dry holes in the Muskwa Shale and a work-over in the Congo — should not be repeated going forward.
Murphy Oil Corporation (NYSE:MUR) is increasing its Eagle Ford production and funding its deep-water exploration activities while maintaining one of the strongest balance sheets in the E&P industry. Given its small (and profitable) asset base, good exploration results could have a huge impact on the company’s future operating results. Besides, the company remains on track to spin-off its US retail business later this year, which should help the performance of its shares.
Significantly cheaper than its peers in the large E&P space and with a very low debt ratio, Murphy Oil Corporation (NYSE:MUR) trades at 2013 12x P/E and 4x P/CF multiples. Paying a 2% cash dividend yield, Murphy Oil Corporation (NYSE:MUR) is my top pick among this group of three companies.
Bottom line
The three companies above will benefit enormously from the US shale energy revolution – and from Israel’s offshore shale gas revolution in the case of Noble Energy, Inc. (NYSE:NBL). That said, and as I always say: “Price is what you pay and value is what you get.” There is a price for everything, and Murphy Oil Corporation (NYSE:MUR) is the best price-adjusted option.
The article Which Large-Cap Domestic E&P Play Should You Bet On? originally appeared on Fool.com and is written by Federico Zaldua.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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