The Oil and Gas Industry Offers Value Investors Interesting Bargains
Nearly 50% of all small- and mid-cap stocks in the oil and gas industry in America are being sold and bought at less than the firms’ book values, the worst level from the pandemic era. This trend has piqued the interest of value investors, particularly those who follow the Ben Graham and Warren Buffett school of thought. Stocks that are priced lower than the assets on their books present classic value investing opportunities dubbed “cigar butts”, and energy companies are currently full of them.
The energy sector has been under pressure lately, becoming the number two worst Q2 performer on the S&P 500. A mix of trade tensions and rising production has pushed oil prices lower. West Texas Intermediate crude briefly dropped to approximately $55 per barrel in April before bouncing back slightly. Still, prices are down by roughly 15% this year.
Shares in companies like Crescent Energy, Noble Corp, and Murphy Oil are available at prices less than the firms’ book values, meaning their market prices are now lower than what their physical assets are worth. Around 33% of energy stocks in the Russell 3000 fall into this category. Just last week, the figure reached 40% before a trade truce lasting 90 days was declared between the U.S. and China slightly bolstered energy stocks and oil prices. When valuations dipped this low in the recent past, the energy sector saw a bull run lasting two years from 2021 to 2022 and outperformed the broader market.
Oil and gas company shares in Canada have followed a similar trend, with many trading well below book value. Value-focused investors like Cole Smead of Smead Capital Management believe the current valuations are overly pessimistic. He sees the stocks as being undervalued with high odds of rebounding, even without a particularly bullish energy outlook.
Several companies have started buying back their own shares in response to these depressed valuations. Cenovus Energy repurchased CA$62 million ($45 million) of stock in Q1 and has already increased that to CA$178 million ($129 million) in Q2. Travis Stice the CEO of Diamondback Energy said buybacks are currently smarter than paying down debt, noting that the company expects to ramp up repurchases while crude prices are still weak.
Still, not every oil and gas company is in a position to buy back stock. Chevron, for example, announced it would cut its buyback program in Q2 due to falling oil prices. Exxon, on the other hand, continues to buy back shares at a steady pace, thanks to its strong cash flow.
Some industry analysts argue that book value is not the best way to assess oil and gas stocks given that it can swing wildly as commodity prices change. BMO Capital Markets analyst Jeremy McCrea prefers metrics like reserve values, EBITDA and cash flow. Still, he notes that the sector still looks cheap, even by those standards. McCrea points out that historically, the best periods to enter the energy market have been during times of heightened uncertainty, and right now, things feel particularly uneasy.
It would be interesting to hear what analysts have to say about the valuations of companies like GEMXX Corp. (OTC: GEMZ) that are involved in the oil and gas industry while also being established players in other industries, such as gold extraction.
NOTE TO INVESTORS: The latest news and updates relating to GEMXX Corp. (OTC: GEMZ) are available in the company’s newsroom at https://ibn.fm/GEMZ
Please see full terms of use and disclaimers on the TinyGems website applicable to all content provided by TinyGems, wherever published or re-published: https://www.TinyGems.net/Disclaimer
Nearly 50% of all small- and mid-cap stocks in the oil and gas industry in America are being sold and bought at less than the firms’ book values, the worst level from the pandemic era. This trend has piqued the interest of value investors, particularly those who follow the Ben Graham and Warren Buffett school of thought. Stocks that are priced lower than the assets on their books present classic value investing opportunities dubbed “cigar butts”, and energy companies are currently full of them.
The energy sector has been under pressure lately, becoming the number two worst Q2 performer on the S&P 500. A mix of trade tensions and rising production has pushed oil prices lower. West Texas Intermediate crude briefly dropped to approximately $55 per barrel in April before bouncing back slightly. Still, prices are down by roughly 15% this year.
Shares in companies like Crescent Energy, Noble Corp, and Murphy Oil are available at prices less than the firms’ book values, meaning their market prices are now lower than what their physical assets are worth. Around 33% of energy stocks in the Russell 3000 fall into this category. Just last week, the figure reached 40% before a trade truce lasting 90 days was declared between the U.S. and China slightly bolstered energy stocks and oil prices. When valuations dipped this low in the recent past, the energy sector saw a bull run lasting two years from 2021 to 2022 and outperformed the broader market.
Oil and gas company shares in Canada have followed a similar trend, with many trading well below book value. Value-focused investors like Cole Smead of Smead Capital Management believe the current valuations are overly pessimistic. He sees the stocks as being undervalued with high odds of rebounding, even without a particularly bullish energy outlook.
Several companies have started buying back their own shares in response to these depressed valuations. Cenovus Energy repurchased CA$62 million ($45 million) of stock in Q1 and has already increased that to CA$178 million ($129 million) in Q2. Travis Stice the CEO of Diamondback Energy said buybacks are currently smarter than paying down debt, noting that the company expects to ramp up repurchases while crude prices are still weak.
Still, not every oil and gas company is in a position to buy back stock. Chevron, for example, announced it would cut its buyback program in Q2 due to falling oil prices. Exxon, on the other hand, continues to buy back shares at a steady pace, thanks to its strong cash flow.
Some industry analysts argue that book value is not the best way to assess oil and gas stocks given that it can swing wildly as commodity prices change. BMO Capital Markets analyst Jeremy McCrea prefers metrics like reserve values, EBITDA and cash flow. Still, he notes that the sector still looks cheap, even by those standards. McCrea points out that historically, the best periods to enter the energy market have been during times of heightened uncertainty, and right now, things feel particularly uneasy.
It would be interesting to hear what analysts have to say about the valuations of companies like GEMXX Corp. (OTC: GEMZ) that are involved in the oil and gas industry while also being established players in other industries, such as gold extraction.
NOTE TO INVESTORS: The latest news and updates relating to GEMXX Corp. (OTC: GEMZ) are available in the company’s newsroom at https://ibn.fm/GEMZ
Please see full terms of use and disclaimers on the TinyGems website applicable to all content provided by TinyGems, wherever published or re-published: https://www.TinyGems.net/Disclaimer
