3 Undervalued Stocks in Oil Worth Buying
By Tyler Crowe | More Articles
May 24, 2015 | Comments (0)
With the S&P 500 growing close to 90% over the past five years, it's getting harder and harder to find undervalued stocks in the market today. That is, unless you are looking in the oil and gas sector. The slog in oil prices that has gone on for close to a year now has presented several opportunities to buy undervalued stocks if you are willing to wait a while for the payback.
Of all the companies in energy today, three really stand out as undervalued: National Oilwell Varco (NYSE: NOV ) , Atwood Oceanics (NYSE: ATW ) , and Denbury Resources (NYSE: DNR ) . Let's take a quick look at why these three companies are some of your best bets when looking at buying undervalued stocks in oil today.
The undervalued trio
There are lots of companies in the energy sector that boast some pretty low valuations in comparison to the broader S&P 500, but that shouldn't come as a big surprise, because the energy sector as a whole has always traded at a discount to the broader market. Over the past 15 years, the sector has traded at a price to earnings ratio of 16.6 times, while the broader market has traded at an average price to earnings of 25 times during that same time period.
What makes these three companies unique, though, is that they have both bargain-bin pricing on the market today as well as histories of decent operational reputations:
National Oilwell Varco is the name when it comes to oil and gas equipment manufacturing. More than 80% of the drilling equipment on floating offshore drill rigs comes from National Oilwell Varco. This dominant market share and a standardization program that ensures any customer that needs a replacement aftermarket part comes back to National Oilwell Varco provides for strong cash flows over the long haul.
Atwood Oceanics may not be one of the flashier names in the offshore rig business since it is a smaller operation, but it has one of the newer fleets of floating rigs that are capable of handling the jobs production companies are willing to pay a premium for. At the same time, though, it has kept a more modest balance sheet and didn't chase too much growth with debt, which has helped the company generate the best returns on capital employed in the offshore business.
Denbury Resources gets unduly lumped in with other American oil and gas producers. Unlike many of its peers that are chasing shale, Denbury's primary business is extracting oil from mature sources with an enhanced oil recovery method of injecting CO2 into the reservoir to repressure the reservoir and release some of the oil left behind after conventional production is done. This business takes a lot of planning and prudent capital management, and Denbury has proven it can do it effectively by generating more cash than its capital expenditures for the past two years running, something very few other independent oil and gas producers can claim.
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