Marathon Oil Corporation (MRO), Occidental Petroleum Corporation (OXY): A Guide to Finding Value When Investing in Energy

Page 1 of 2

Whether you’re looking for value, growth, income, or a combination of all three, the energy industry has something for every investor. That being said, it can be a little bit harder for the average investor to see the value here, because investing in energy requires you to drill deeper than the average valuation metric.

Most investors probably have some familiarity with a price-to-earnings ratio as a form of pegging a value on a company. Unfortunately, as you will soon see, it’s really not the best tool to use to gauge relative values when investing in an oil and gas producer. To demonstrate, let’s look at a chart that groups a number of well-known energy companies by P/E ratio:

Source: Occidental Petroleum Investor Presentation (Opens in a PDF).

Smaller oil-focused E&P company Pioneer Natural Resources (NYSE:PXD) trades at what would appear to be a rather expensive 30.6 times earnings. That’s about twice what Bakken-focused¬†Continental Resources, Inc. (NYSE:CLR) trades at. Both appear to be valued much more expensively than larger independent E&P companies including¬†Marathon Oil Corporation (NYSE:MRO) or Occidental Petroleum Corporation (NYSE:OXY), which could hurt your investing returns.

Marathon Oil Corporation (NYSE:MRO)

Drilling down, looking for value
The other thing to keep in mind when looking at a P/E ratio is that it tells only part of the story. Earnings could have been affected by one-time charges resulting from an asset impairment or gains on derivatives used in hedging out oil and gas price volatility. For example, last year, low natural gas prices cost Pioneer Natural Resources (NYSE:PXD) a total of $532.6 million after the company took several writedowns on its Barnett shale dry-gas properties. Meanwhile, Continental Resources, Inc. (NYSE:CLR) took more than $100 million in property impairment charges last year, however, that was more than offset by nearly $200 million in gains on derivatives last year. The volatility of commodity prices can really affect the earnings number, making the P/E ratio a less than optimal metric to use in valuing a potential investment.

A much better metric for an apples-to-apples comparison is the enterprise value-to-EBITDA ratio. This takes into account all of a company’s assets and debt and divides it by its earnings before interest, taxes, depreciation, and amortization. When looking at these same companies and applying that valuation metric, you get a very different investment story:

Source: Occidental Petroleum Investor Presentation.

In this case we can see that Pioneer Natural Resources (NYSE:PXD) is still actually pretty expensive on a relative basis, while Continental Resources, Inc. (NYSE:CLR) also possesses a high-end valuation. On the other hand,¬†Whiting Petroleum Corp (NYSE:WLL) and Marathon Oil Corporation (NYSE:MRO) and very inexpensive on a relative basis. While this metric doesn’t tell you why these companies are cheap, it does provide you with a great starting point when investing with an eye for value.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!