Some big names in the oil and gas business have seen stock valuations fall over the past five years.  Do these companies represent long term value plays or just bad investments?  Three firms are reviewed here with my personal thoughts on which are worth buying or avoiding.

Rhinestone or diamond in the rough?

Back in 2012, Devon Energy Corporation (NYSE:DVN) divested its Gulf of Mexico and foreign assets to concentrate on its onshore North American oil and natural gas exploration and production business.  Smart move given how those commodities have grown.  While Devon’s oil and natural gas production have grown, its stock price hasn’t.  After peaking in 2011, Devon now trades near its five year lows.  Given its oil sands and shale gas assets, Devon currently sells for about half its net asset value.  Throw in $7.5 billion in cash and Devon looks well positioned to grow.  On the other hand, Devon plugged its third oil exploration well in Utica shale due to disappointing results.  Its Houston headquarters announced layoffs as part of its consolidation plans.  On top of it all, oil production has experienced take-away problems endemic to the oil sands industry and natural gas prices remain under pressure.

There are those who see Devon as a long term value investment.  I’m sorry, but when a company trades near its 5 year lows, sells at a PE ratio around 32, pays a modest 1.5% dividend, experiences major transportation problems with its most high margin business (e.g. oil) and price pressure for its highest volume product (e.g. natural gas), that company just does not scream “BUY” in my little world.  Yes, having $7.5 billion in cash helps, but for me it’s not enough.  While some believe Devon is a “buy and forget” investment that will grow for the next two years, I think you should forget Devon for two years before buying it.

Marathon for the long run

Like Devon, Marathon Oil Corporation (NYSE:MRO) engages in both oil and natural gas production.  Unlike Devon, Marathon’s oil comes from shale.  In fact, Marathon recently sold oil sands assets.  This affords Marathon the advantage of oil assets closer to refineries and avoiding some of the transportation problems of Canadian oil.  And it gets better.  Marathon owns $2.6 trillion in natural gas reserves.  Its investment in Eagle Ford shale oil is paying off big with more to come.  Despite lost production in Libya, earnings grew last quarter.  And its international assets round out the proven reserves picture.

Given the streamlining of assets towards high quality oil plays, the future looks good for Marathon.  Recent declines in revenue seem to be reversing and the stock is slowly coming off its recent lows. Currently, Marathon stock trades for roughly $21/barrel of proven reserves.  The fact that Marathon is producing, rather than exploring, further enhances its appeal.  Throw in a PE ratio of about 17 and a dividend of around 2%, and I think Marathon is a better investment than Devon.

But best of all...