Barron's cover story this weekend was a comprehensive look at energy, chock full of observations and recommendations. I tend to dislike comprehensive pieces, as they tend to simplify what is indeed very complex. But this piece had some good ideas as well as some bad ones.
Take their very quick analysis of the major integrated energy companies, like Exxon (XOM), Chevron (CVX), Conoco-Phillips (COP), Royal Dutch Shell (RDS) and Total (TOT). Analysis of these companies used the three most widely available statistics that most oil analysts use: reserve growth, equivalent energy production and dividend history. Analyzing these gave Barron's a clear choice in Chevron, one with which I would argue.
There is a strong bias inside the energy sector for dividends right now and the stock prices are reflecting that. While I can't fault any investor for fleeing towards dividends in this unsettled market, it does not make integrated stocks the best value in the space, nor particularly Chevron the best of those dividend payers. Indeed, the outlook of crude and nat gas prices was not even considered in their analysis. For this and other reasons I much prefer RDS and XOM to CVX, both recommendations I've made in the past.
Barron's did well pointing out the deep value in independent E and P companies, which I entirely agree with. Compared to the majors, independents like Apache (APA) and Anadarko (APC) are grossly undervalued, but I need a better price on both considering their recent quarterly reports and will wait for them.
But Barron's dropped the ball in their trashing of natural gas stocks. They used the ridiculous price-to-sales metric to determine their relative value. Wow. It's hard not to have an inflated P/S number when natural gas has been sitting at historic lows of under $2/mcf for most of the last two quarters. By that backwards-thinking analysis, you'd likely be loaded with Apache shares above $140 when oil was trading over $130 a barrel in 2008 because, gosh, the price-to-sales were so cheap.
No, the thesis with natural gas is that prices of all commodities cycle and we need to take advantage of prices that are cycling downwards, as natural gas has done this year. Any analyst who really believes that we are destined for dirt-cheap dry gas prices for as far as the eye can see has little perspective on commodities and less on historical natural gas volatility. Believe me, all the economic and market forces I know will inevitably drive gas prices higher and their stocks with them.
I subscribe to Barron's because their information and analysis are solidly created and their writing is terrific, but as stock pickers their record is dismal. As a source of ideas for further work, Barron's is very worthwhile and one of my treasured tools. But as an advisor I take much of what they say with a grain of salt and you should too.
