Portfolio Manager Robert Hordon of First Eagle Investment Management says Plum Creek Timber Co. Inc. (PCL), one of the largest private landowners in the U.S., is now one of the top 10 holdings of his firm’s Global Income Builder Fund.
“As a firm, we have been involved with it for many years. We find Plum Creek attractive for several reasons,” Hordon said. “First, from a valuation perspective, we think the prices that are currently being paid for timberlands in the private market would support a materially higher valuation for the company as a whole, along with the potential for selling land for higher and better use purposes, such as real estate development.”
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Hordon also says that over time he expects the company’s earnings power to trend up thanks to a strengthening timber market. Additionally, he finds Plum Creek’s capital return to be an important part of its story.
“The dividend yield here is about 4%, and the company is committed to share buybacks and has an ongoing share buyback program,” Hordon said.
Sanford C. Bernstein & Co. Analyst Oswald Clint recently upgraded Royal Dutch Shell plc (ADR) (RDS.A) to an “outperform” rating. He says his upgrade was based in part on Shell’s decision to reduce spending on unconventional shale resources in North America.
“I guess we watched a lot of money being spent to the tune of $26 billion, and we weren’t quite sure that the results from that expenditure would equal growth, higher returns, or even returns that match the returns of their North American business, which has been 20% return on capital for quite a period of time,” Clint says. “We felt it was too much of a move in the wrong direction and it would dilute the returns from a strong business line, and that’s what got us cautious on the stock through 2012, 2013 and some part of 2014.”
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Recently, Shell has changed its strategy with respect to that business line, Clint says. In addition to reducing capex, he says Shell announced a divestiture plan that is refocusing on only the best parts of that portfolio. He believes the worst is behind the company.
“What they are left with is reasonably high quality, and we now expect returns in that business to improve from here,” Clint says. “So combined with valuation, the dividend yield, the balance sheet, strong portfolio, but this improving North American business plus also some exploration success, which we haven’t seen in almost 10 years, that created a more positive, constructive investment case, and that’s why we took that decision to upgrade it.”
RBC Capital Markets Analyst Leo Mariani recommends Newfield Exploration Co. (NFX) in the current low oil price environment because he says the company is more protected from commodity prices than some of its competitors. Mariani says Newfield sold some assets during 2014 and was able to put away some cash, resulting in a very strong balance sheet.
“Additionally, they also have a strong hedge position for the next few years,” Mariani says. “So this weakness won’t bother the business as much as it may some others.”
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Newfield also has good properties in the Anadarko Basin in the scoop/stack plays, which Mariani says are emerging plays. Since they are not yet as established as the Permian and the Eagle Ford, Mariani says Newfield could see big gains in efficiency in Anadarko over the new few years, as they optimize the drilling and completion in that basin.
“I think if they are able to do that in the next few years, you’ll see much better rates of return on those properties,” Mariani says. “It’s also a very cheap stock with a low multiple. I think if they execute, and they have done a good job, you’ll see some multiple expansion for Newfield over the next year or so.”
Raymond James & Associates Analyst Andrew Coleman says QEP Resources Inc (QEP) is a great option for investors looking for a midcap E&P stock. QEP Resources is a 50/50 gas/oil producer that was formerly a part of Questar Corporation (STR).
“In the last few years, since spinning out of Questar, they have repositioned the company adding Bakken and Permian positions, plus divesting Mid-Continent and midstream assets,” Coleman says. “The sale of its midstream business netted the company $2.5 billion in cash, cash that came in the door December 2, 2014.”
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Coleman says the question investors have about most E&Ps right now is how much debt they are carrying on their balance sheets. In contrast, he says QEP Resources has positioned itself well, with one of the best balance sheets in the sector, behind EOG Resources Inc (EOG).
“And [QEP Resources] have over $1 billion of cash on hand,” he says. “Now the question is, do they have an opportunity to be an acquirer of assets that would be strategic fit for them in a market when most of their peers are trying to rein in spending and kind of pay down debt.”
Questar Corporation (STR) CEO Ronald Jibson says the company is has a goal to acquire about $50 million a year in acquisitions of new production assets. He says the “lowest-hanging” fruit is in acquiring additional interest in wells where the company currently operates, specifically its lowest-cost producing areas in the Vermillion Basin.
“So over the last two years now, we’ve been able to acquire a little more than the $50 million a year, but we’ve also indicated that that will be a little bit lumpy depending on the assets, and so we’ve acquired $150 million worth of production assets in the Vermillion Basin,” Jibson says. “This is important to us because these assets are very low-cost, they’re very good production areas, and we’ve got very good information and history on these assets. So when it comes time to produce these assets, we feel very positive about the return associated with that.”
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In December 2014, Questar, through its subsidiary Wexpro, acquired about $52 million worth of assets in the Canyon Creek area of the Vermillion Basin. To address concerns that Wexpro would eventually finish drilling all of its production assets, Questar forged an agreement with regulators a couple of years ago.
“What we call Wexpro II was approved by both Utah and Wyoming in April of 2013, and that gives us the opportunity to add new properties to the Wexpro Agreement,” Jibson says. “So that gave us the opportunity then to go out and acquire new low-cost production assets that were in the same fields that we currently have assets in.”
Occidental Petroleum Corporation (OXY) is one of Raymond James Analyst Pavel Molchanov’s top ideas in the oil & gas sector for 2015. He says the company is uniquely positioned to provide visibility on share buybacks for this year because it is the only U.S. oil & gas producer with market cap in excess of $20 billion that ended 2014 with more cash on hand than debt.
“The reason is the $6 billion special dividend received by Occidental as part of the spinoff of California Resources (CRC) at the end of November,” Molchanov says. “This was a very one-sided spinoff, with California Resources levering up to the hilt, and Occidental getting the full benefit.”
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Molchanov speculates that if Occidental were to use the entire special dividend for share buybacks, that would be 10% of shares outstanding.
“I cannot think of any other oil and gas company that will be in a position to repurchase 10% of shares outstanding in the next 12 months,” he says.
As a result of the “oil price meltdown” Raymond James Analyst Pavel Molchanov says oil producers are cutting spending by as much 50%. As one of the largest oil & gas companies in the world, Molchanov says Chevron Corporation’s (CVX) cuts are likely to be more modest, potentially in the 10% to 20% range.
“As far as where precisely spending will be reduced, well, that’s an interesting question. Chevron, like many companies in the multinational peer group, has a significant amount of spending on long-lead-time projects,” Molchanov says “That includes LNG projects in Australia and some deepwater developments in the Gulf of Mexico, for example. Those are very difficult to cut while they are being built because the fact of the matter is, if a project like that is in construction, in almost every instance it’s going to be taken to its completion.”
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Instead, Molchanov says Chevron will likely curtail short-cycle spending. He says that could include drilling in the Permian Basin of West Texas and the Vaca Muerta shale in Argentina.
“But the long-lead-time projects for Chevron and for anybody globally, whether it’s in Brazil or in Australia or in the Gulf of Mexico, or in the North Sea, those projects are going to be taken to fruition,” he says.
Senior Analyst Jim Sinegal of Morningstar urges investors not to give up on Bank of America Corp (BAC). In a generally difficult banking environment, Sinegal says BAC is one of the more attractive banks.
“I think investors are once again throwing in the towel on Bank of America just as the tide is turning,” Sinegal said. “Consumers are finally starting to lever up again, the big expenses are out of the way, and the company is finally back to day-to-day blocking and tackling.”
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Sinegal says that from a business quality perspective, Bank of America is at least as good as JPMorgan, yet trades at a much lower multiple of tangible book value. He says this is due to bad capital allocation decisions made by previous management.
“They’ve dealt with that, and they should finally be back on offense in the next 12 to 18 months,” Sinegal said. “If you look at their deposit base and their ability to generate noninterest revenue, it’s actually very impressive.”
Senior Analyst Jim Sinegal of Morningstar says that Citigroup Inc (C) is an attractive, undervalued stock right now that will have a lot more investor interest once it boosts its dividend and payout capital and continues its exposure to developing markets.
“We think Citigroup worth $57. It’s trading a little under $50 the last I looked. So that’s equal to tangible book value per share. It’s a little over nine times the consensus EPS for 2015, so that’s fairly cheap on an absolute and a relative basis. The other big banks are 10 to 12 times forward earnings,” Sinegal said.
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Sinegal also likes Citigroup’s strong management and board, and believes that the company has solid growth prospects and a number of options to improve its business.
“Citi’s management has been doing a great job for several years now, especially at the board level,” Sinegal said. “It is probably the strongest board out of all the big banks.”
“Citi has exposure to developing markets is a big plus for long-term growth,” Sinegal added. “From growth prospects and the number of options they have to improve their business to the management at the board side, and then that the valuation is very cheap on a price to tangible book and price to earnings basis — all of this makes Citigroup a good stock right now.”
Portfolio Manager Eswar Menon of Geneva Advisors says HDFC Bank Limited (ADR) (HDB) is a bank that is well-managed and well-positioned to take advantage of country-level changes in India.
“We believe they can continue to grow for the next five to 10 years, thanks to the changes the government is making and the fact that it is a very well-run with a solid balance sheet. They should grow earnings 20%-plus over the next five years,” Menon said.
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HDFC Bank has continued to gain market share over the last 20 years, Menon says, and the factors driving growth in India right now are very good for the bank, particularly the rise of the middle class and purchasing power of the rural population.
“India is under-banked; its demographics are great. We think India is entering a period when economic growth is going to arise. India last year did about 5.5% GDP growth. We think that’s going to steadily increase over the next three to five years where you probably reach 7% to 8% levels of growth,” Menon said.
“This is a bank which we think is well-positioned for the next five to 10 years in terms of providing opportunities for the investors. We think the potential of the HDFC Bank is pretty strong,” Menon added.
