Book Value Buys in Energy

12/05/2013 8:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Two energy issues have passed our screen for low-price to book value stocks; both stocks have price to book ratios of less than two, Value Line Financial Strength rating of B++ or better, and forecasted EPS growth during the next 12 months of 15% or higher, notes J. Royden Ward, editor of Cabot Benjamin Graham Value Letter.

Apache (APA), founded in 1954 and based in Houston, is one of the largest independent exploration and production companies in the US, with operations in Canada, Egypt, the UK, Australia, Argentina, and Chile.

During the past three years, Apache has made four major purchases totaling $12 billion. The company's aggressive buying spree has added substantial crude oil and natural gas assets with great potential.

Exceptional production growth could push sales and earnings considerably higher than expected. Apache sold 33% of its troubled assets in Egypt to Sinopec for $3.1 billion, which will help to pay down its debt.

After a sharp drop in EPS in 2012, caused by slower production, and low oil and natural gas prices, Apache is poised to bring newly acquired production online and increase sales by 9%, and boost EPS by 32% to $8.85 during the 12 months ending September 30, 2014.

With a P/E ratio of 13.6 times my EPS estimate and a low P/BV ratio of 1.12, APA is undervalued. I expect APA to reach my minimum sell price target of $127.60 within one to two years.

Noble (NE), founded in 1921 and based in Switzerland since July 2009, is one of the world's leading offshore drilling contractors. The company now operates a fleet of 68 offshore drilling rigs.

Eleven new drilling rigs will be added to the fleet during the next 15 months, which will make Noble the second largest in the world. In recent months, the permitting process in the US Gulf of Mexico has improved, allowing more drilling deepwater units to operate in the Gulf.

Noble took delivery of two new rigs in the third quarter and will take delivery of three more in the fourth quarter. The added capacity will help boost sales by 16% and EPS by 29% during the next 12 months ending September 30, 2014.

At 15.3 times current EPS, and with a price to book value ratio of 1.17, NE is undervalued. The dividend yield of 2.5% is attractive, and EPS will likely increase a hefty 19% per year during the next five years. The stock will likely rise to my minimum sell price target of $60.07 within two years.

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