Donald: I think the Oil industry will explode soon.
PMFJI. Thanks for the tip on Swift Energy. The information you have posted looks quite interesting and deserves a second look. Thought I might add some additional industry perspective.
I'm a senior analyst for an oil company, and I usually love investing in independent oil stocks, but I'm presently proceeding with caution in this sector in the short term.
Several industry analysts are expecting oil prices to fall $1-$2/bbl in the next month due to the imminent flow of Iraqi crude exports. The reason is rather complex, but very predictable: Iraq is chasing a total cash target mandated by the United Nations (not a total production target), and they've already lost 2 months out of their allotted 3-month export window due to administrative haggling with the UN over aid distribution. Because of these constraints, Iraq will be forced to ship much higher levels of crude into the export market than last year just to even get close to the cash target they've been allowed by the UN. Unfortunately, the increase in exports will temporarily flood the market, driving crude prices down, and forcing Iraq to ship even more crude to generate the same revenue level. The net effect is a downward price spiral. (IMO this was a stupid political agreement obviously developed sans input from an economist.)
Given the short-term oil price outlook, I fully expect most of the E&P stocks to fall in sympathy with crude prices in coming weeks, as they have often done historically. However, the effect should be short-lived (maybe just 2-3 months?), given that the oil price drop is being driven by an artificial supply/demand anomoly.
One more thing to consider about the independents is that they trade more on cash flow than earnings. While the P/E discount to the rest of the industry appears attractive, you can usually get a better perspective on the company's true value by examining its price to cash flow (P/CF) ratio relative to the industry, since most E&Ps trade in a range of 5-9X cash flow from operations. Any P/CF multiple of 5 or lower would indicate true undervaluation for an E&P company.
Do you happen to know offhand what the P/CF ratio is for SFY? If not, you can easily calculate it by referring to the cash flow statement in the last 10-K.
Razor |
