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Update Statoil

posted on June 27, 2015 at 9:05 pm
oil_rig_sea

Update: April 14. The acquisition of BG Group by Royal Dutch Shell (RDS.A) has grabbed all the oil sector headlines. $51 billion deals will tend to do that—especially when they’re priced at a 52% premium to the pre-deal market price for BG Group. The acquisition makes Royal Dutch the biggest player in the world in the liquefied natural gas sector, expands the company’s presence in Brazil’s pre-salt oil projects in the South Atlantic, and gives Royal Dutch a big presence in waters off the east coast of Africa, one of the world’s most promising new areas for exploration. In short it’s not a bad deal although it is expensive: Credit Suisse calculates that the deal will dilute earnings at Royal Dutch by 10% in 2016, the year the acquisition will close, 5% in 2017, and then 1% in 2018, the year when the acquisition turns earnings positive.

The big deal headlines have overshadowed a series of announcements from Norway’s Statoil (STO) that on a smaller scale promise to continue the transformation of Statoil from a company focused on the North Sea to one with a major presence in the Gulf of Mexico, the Arctic frontier, and the same East African waters that Royal Dutch has just bought into.

For example, on March 30, Statoil announced the discovery of an additional 1 to 1.8 trillion cubic feet of natural gas at an exploration well in the water off Tanzania. That brings the company’s discoveries in the area to 8. I think Statoil’s discoveries, the much bigger finds by Italy’s ENI (ENI), and BG Group’s exploration success in the area has put the natural gas reserves of East Africa over the top. There’s now clearly enough natural gas in the area to make the investment in liquefied natural gas facilities to export LNG to Asia a viable and attractive proposition. Statoil already exports liquefied natural gas from its fields on the Norwegian continental shelf. Now it will be able to export LNG to the highly lucrative Asian markets from fields much closer to those markets.

Shortly after that announcement, Statoil reported another find, this one in the Gulf of Mexico. Statoil, the operator of this well has a 50% interest in its oil production with Anadarko Petroleum (APC) holding a 37.5% interest.

And then, finally, today, April 14, Statoil announced another natural gas find near its Aasta Hansteen field in the Norwegian Arctic. Statoil put the find at 2 billion to 7 billion cubic meters of natural gas. In the last year Statoil has increased its estimates of the size of this field by about 25%.

It’s hard to tell if it’s time to buy Statoil. The company’s total costs are relatively high because of taxes imposed by the Norwegian government and hefty depreciation. That has helped push Statoil’s New York traded ADRs down 26% in the last 12 months, as of April 13, but it also means that Statoil is very highly leveraged to any recovery in the price of oil that takes the Brent benchmark back towards $65 a barrel.

The ADR’s chart looks like it shows a pattern of higher highs and higher lows over the last six months but the pattern isn’t especially strong with the December 2014 high at $18.55, the February high at $19.62 and the ADRs closing at $19.55 on April 14. The dividend yield is 4.84% at the moment but Statoil isn’t covering that dividend from operating cash flow—and won’t until 2016—so it’s not clear how safe it is.

I’ve owned this stock in my Jubak’s Picks portfolio since September 2009 and it is down 14.02% in that time. Certainly I can’t tell you when the plunge in oil prices is over, but I think the odds are good that we’ll finish 2015 near the $65 a barrel level that would work well for Statoil. I am cutting my target price today since I think $37 is a bit ambitious. The new target is $28 a share by October 2015.

 

Marathon Petroleum

posted on June 27, 2015 at 7:41 pm
Oil rigs - land

I don’t see a lot of situations where I’d be willing to put money on a company beating analyst expectations for first quarter earnings and raising guidance for the rest of 2015. Earnings and economic trends in the first half of the year don’t make the odds on that kind of good news especially favorable across the market.

Marathon Petroleum (MPC) is an exception, however. I think the refiner has a good chance to surpass expectations for earnings of $2.33 a share on revenue of $19.68 billion when it reports earnings on April 30.

Refining margins per barrel are likely to come in above the current $17 a barrel consensus—and could be as high as $19 a barrel. The company’s Speedway retail unit’s recent acquisition of 1,256 retail outlets from Hess (HES) effectively doubles the number of Marathon’s retail outlets (and makes Speedway the largest U.S. convenience store chain by revenue) and comes as low gasoline prices—down to a projected average of $2.45 a gallon from last summer’s $3.59, according to the U.S Energy Information Administration–are forecast to put more Americans on the road and to increase gasoline purchases by volume by 1.6%. Those extra gasoline purchases will put more people into Speedway’s convenience stores. In addition, the company will see lower maintenance costs (about $350 to $400 million) in 2015 thanks to a heavy maintenance program in 2014. And the company is on track to expand refinery volumes in 2015.

A little more detail on that last point: The company has two new condensate splitters adding to refining capacity in 2015. Condensate splitters are less costly refineries that take advantage of the easier to refine light oil coming out of the U.S. oil shale production boom. In addition, the ability to relatively quickly run light crude through a splitter will increase Marathon’s export capacity since this lightly refined oil can be exported while unrefined crude can’t thanks to a 1970s ban on crude oil that remains in place. And finally, Marathon’s purchase of BP’s Texas City refinery shifts Marathon’s refinery profile toward the Gulf Coast and away from its past emphasis on mid-continent capacity just as the trend in U.S. oil production makes the Gulf Coast the place to be. (The purchase will result in 62% of Marathon’s capacity coming from the Gulf Coast.)

All this is projected to lead to a huge increase in operating cash to $14.32 a share in 2015, Credit Suisse projects, from an actual $10.85 a share in 2014. It’s certainly not implausible to believe that the company will chose to return some of that cash flow to investors via share purchases or an increase in the current 2.01% dividend yield.

I’ll be adding Marathon Petroleum to my Jubak’s Picks portfolio tomorrow, April 9 with a target price of $125 a share. The shares closed at $98.56 today, April 8 with a gain of 0.32%. (Crude oil prices plunged today on a bigger than expected build in U.S. crude inventories. U.S. benchmark West Texas Intermediate fell 5.59% to $50.96 a barrel.) Marathon Petroleum shares trade at 12.99 times trailing 12-month earnings per share and 9.79 times projected 2015 earnings per share.

Update Marathon Petroleum

posted on June 27, 2015 at 7:34 pm
Oil rigs - land

Update April 29, 2015.  Marathon Petroleum (MPC), a member of my Jubak’s Picks portfolio since April 8, today announced a two-for-one stock split. The shares will begin trading on a split-adjusted level on June 11. The company’s board of directors also voted to maintain the current pre-split dividend of 50 cents a share. (The record date on the dividend is May 20.)

The company is due to report first quarter earnings tomorrow, April 30. Since a split doesn’t change anything about the company, except the share price, I’m keeping my target price at the current pre-split $125 a share. After June 11 that will become an effective target of $62.50.

At 3 p.m. New York time today, Marathon Petroleum traded at $102.30.

Sell Ensco

posted on June 27, 2015 at 7:16 pm
oil_rig_sea

On May 11 I posted that I would sell Ensco (ESV) out of my Dividend Portfolio on May 12. I’ve been slow in posting the actual sell, however, and the usual recap of my logic. My apologies. Here’s that sell post now. On May 11, the shares closed at $26.13. On May 12, the close and sell price for the shares was $26.79. Today, the shares closed at $25.26. I missed the local high with my May 12 sell by a day. The shares closed at $27.35 on May 13.

The logic of the sell was simple: The rally in the shares of land-based and deep water drillers that went along with the rally in oil prices had gotten ahead of itself. Before a slight retreat on May 11, Ensco had been up 16.6% in the month.

The fundamentals of the deepwater drilling companies look likely to continue to deteriorate into 2016 as oil producers negotiate aggressively to cut their costs and a big back log of new rigs ordered near the market peak is set to hit the water in 2015 and 2016 before the schedule gets much lighter in 2017.

I suggested taking profits here before those fundamentals reasserted themselves in investors thinking.

Ensco’s quarterly earnings report, released on April 30, filled in some of those fundamentals. Ensco shows that 20 rigs (6 floaters and 14 jackups), roughly 30% of the company’s fleet, will roll off contract in 2015. Even if all of those rigs find new work, they’ll find it at lower day rates. Producers are determined to reduce costs by squeezing suppliers so that they can make money at $70 a barrel or lower and don’t need a return to $100 a barrel oil to turn a profit. In addition, drillers face a huge bulge of new construction. Estimates for the sector show 19 new rigs under construction for delivery in 2015 and 14 in 2016 before dropping to 4 in 2017 and 1 in 2018. (These figures don’t include rigs under construction in China.) Some of these will undoubtedly be delayed or even canceled, but their existence will help push down prices. Ensco itself has 3 drill ships and 3 jackup rigs under construction.

Total spend by oil producers on floaters will fall to $34 billion in 2015, down 8% from 2014, according to Credit Suisse with the analyst projections looking for another 10% to 15% drop in 2016 to $30 billion. If that projection turns out of be accurate, then I think we’re looking at capital spending on rigs bottoming in 2016 and a more sustainable rally emerging later in 2015 when that projection gets some confirmation from the data. I’d look to rebuy Ensco on that schedule.

Sell SeaDrill

posted on June 27, 2015 at 7:12 pm
oil_rig_sea

On May 11 I posted http://jubakam.com/2015/05/sector-monday-oil-drillers-are-ahead-of-themselves-and-i-say-time-to-take-some-trading-profits/ that I would sell SeaDrill (SDRL) out of my Jubak’s Picks portfolio on May 12 (but keep the ADRs in my Dividend Portfolio.) I’ve been slow in posting the actual sell, however, and the usual recap of my logic. My apologies. Here’s that sell post now on May 19.

On May 11, the ADRs (American Depositary Receipts) closed at $14.06. On May 12, the close and sell price for the ADRs was $14.13. Today, the ADRs closed at 12.91. I missed the local high with my May 12 sell by two days. The ADRs closed at $14.98 on May 14.

The logic of the sell was simple: The rally in the shares of land-based and deep water drillers that went along with the rally in oil prices had gotten ahead of itself. Before a slight retreat on May 11, SeaDrill had been up 13.8% in the month and 33.1% in three months.

The fundamentals of the deepwater drilling companies look likely to continue to deteriorate into 2016 as oil producers negotiate aggressively to cut their costs and a big back log of new rigs ordered near the market peak is set to hit the water in 2015 and 2016 before the schedule gets much lighter in 2017.

The collapse in demand for deepwater drilling rigs is now cutting into the competitive advantage of drillers with the youngest fleets as companies such as SeaDrill and Ensco are looking at taking fifth and sixth generation rigs out of service because of continued deep cuts in capital spending at oil producers. At the end of the first quarter of 2015, 211 floater rigs were working, projections by Credit Suisse show that dropping to 170 working floaters by mid-2016 and 130 by the end of the year. Which would be bad enough if so many new rigs weren’t currently under construction. Estimates for the sector show 19 new rigs under construction for delivery in 2015 and 14 in 2016 before dropping to 4 in 2017 and 1 in 2018. (These figures don’t include rigs under construction in China.) Some of these will undoubtedly be delayed or even canceled, but their existence will help push down prices.

I suggested taking profits on this rally, even if you are underwater on this position longer term (as I am), before those fundamentals reasserted themselves in investors thinking and the stocks go back into retreat. SeaDrill is scheduled to release its first quarter earnings report on May 28.

As the most leveraged company in the sector, SeaDrill is a special case: investors are afraid that the company’s debt levels won’t allow it to survive the downside of the cycle. The company finished 2014 with $10.7 billion in long-term debt, down slightly from $12 billion at the end of the third quarter of 2014. Cash and cash equivalents fell to $1.26 billion at the end of 2014 from $1.52 billion at the end of the third quarter.

And that’s after SeaDrill cancelled its dividend completely to save $513 million in dividend payments in the last quarter of 2014.

It’s that dividend cancellation that gives SeaDrill enough upside potential for me to take a chance on riding out cycle with SeaDrill. (I think the company can weather the cycle. SeaDrill arranged for $10 billion in financing commitments in 2014.) Dividend investors fled the stock in 2014 as it eliminated its dividend. The prospect of a renewed dividend—certainly no earlier than 2016—would pop the stock as seekers for high yield rebought.

Recognizing that this is a very speculative bet, I don’t want to load up on SeaDrill, which is a member of two of my portfolios, Jubak’s Picks and Dividend Income. I’m going sell it out of Jubak’s Picks on the recent rally with the idea of rebuying on the next bottom (and then maybe riding the cycle one more time.) I’m going to keep it in the Dividend Income portfolio, however, for the eventual (I believe) pop on the restoration of the dividend (or on the belief that the dividend will be restored.)

I realize the allocation between the two portfolios is rather arbitrary but it’s based my approach to the two portfolios, which gives more emphasis to trading in the 12-18 month Jubak’s Picks portfolio.



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