Date of Source: 26 Jun 2016
In the stormy seas of the energy market, Big Oil companies have been one of the few beacons of stability. As oil prices declined more than half over the past couple of years, companies with exposure to every facet of the oil and gas value chain saw declines ranging from 10% to 30%. To some, this stability and the traditionally generous dividends have made for a compelling investment thesis, but actually getting to know and understand the complex world of Big Oil companies is far from simple. […]
Tyler Crowe impresses with his deep understanding of the industry’s value drivers by focusing on broadly defined resources (vice “reserves”), low cost of future supply, the pronounced lag time between spending (i.e., “dollars in”) and production (i.e., “dollars out), capital discipline (i.e., balancing the capital budgeting priorities of right now versus the future), and valuation. I especially thought it was inventive how he tied together data on firms’ oil price projections with future cost of supply. It makes sense that companies which allocate capital based on more conservative price projections will be relatively better prepared for any prolonged downturns — yet being overly conservative could result in missed growth opportunities.
Tyler indicates that due to the lag time between spending and production, information from the statements of cash flows is especially pertinent. He also indicates that, due to the cyclicality of cash flows and earnings, that the price-to-tangible-book-value ratio is a relatively good metric for valuing these companies. I agree.
I was a little surprised that Tyler omitted any mention of the competitive advantages of vertical integration how it can act as a hedge against wild commodity price cyclicalities — he has brought that topic up multiple times on the Weekly Energy Edition of Motley Fool’s Industry Focus Podcast. Overall though, great work.
Article Source: Tyler Crowe. 5 Point Checklist for Investing in Big Oil. Motley Fool. 26 Jun 2016. Original content accessible: https://www.fool.com/investing/2016/06/26/5-point-checklist-for-investing-in-big-oil.aspx
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