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MENAFN - Khaleej Times - 25/08/2014
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(MENAFN - Khaleej Times) The euro has now fallen to 1.3420, more than 200 points below my strategic recommended short level at 1.3650. Cable was, as I thought, last week vulnerable to the euro's fall and extreme position in base rate hike expectation dashed by the Bank of England minutes. The Canadian dollar has plunged from my 1.0730 sell level to 1.0820. Dollar/yen was an ideal buy at 101.30. Energy has been my favourite theme in 2014. Cheap valuations, credible EPS growth, money-flow momentum, Middle East/Russia geopolitical risks, inflation hedge and deal talk/restructuring (Oxy, Anadarko, Apache) all reinforce my enthusiasm for the sector.

Occidental Petroleum, a firm with a major UAE footprint via its stake in the Dolphin Project and the Shah oilfield, was founded by legendary wildcatter Armand Hammer and discovered epic gushers in Alaska, Libya and the North Sea. Oxy is a firm in transition as it slashes its noncore businesses, spins off its California operations to focus on drilling in Texas shale, where it is the largest producer in the Permian Basin. The real ballast for Oxy will be the divestiture of its high risk, low-return Middle East and Africa projects, midstream/pipeline assets in a quest to reduce both geopolitical risk and corporate debt. Since global E&P firms trade at significant valuation discounts to pure-play US producers, Oxy is a candidate for a valuation rerating, given it trades at a significant discount to NAV. Oxy's assets in the Arab world are in Iraq, Libya, Qatar, Oman, the UAE and Yemen. Occidental's value zone is in the 95-98 range for a 108 target for me or 13 times earnings as I expect both a rise in free cash flow/accelerate share buybacks and a secular rise in dividend growth.

Apache has been a beauty since February, when the shares traded at 78. Apache has sold one-third of its oil and gas fields in Egypt's Western Desert to Sinopec and will now sell almost a billion dollars in Argentina assets. I had profiled Apache as one of America's most attractive E&P firms since 2013 and Apache has vindicated my faith, up 28 per cent in the pastfour months. Like Oxy, Apache is ramping up reserves/production in the Permian Basin in West Texas. However, unlike Oxy, I believe the valuation rerating in Apache is behind us. The time to buy Apache was three month ago at 80-85, not now when the rerating is over.

Chevron has been another Big Oil/Seven Sister supermajor I often profiled in this column. Chevron has also been an outperformer on Wall Street, up 18 per cent since last February at 134. Chevron, to me, was attractive due to its incredible exposure to some of the planet's most attractive energy themes, from Australian LNG (Gorgon/Wheatstone), Gulf of Mexico deepwater drilling, Angola, the Caspian, Marcellus/Permian Basin shale, Brazil, Southeast Asia. I was stunned by the Q2 daily production data, 2.562 million barrels of oil equivalent with some of the most attractive upstream margins I have seen in this sector.

Sure, production growth is flattish in 2014 but Chevron's Australian/Angolan LNG projects and offshore Gulf of Mexico will boost production/reserve growth next year. I believe new money should avoid Chevron at 134-135 as the risk-reward potential is mediocre here, even though I expect the shares to move higher. However, Chevron can deliver 11 EPS in 2014 and thus has compelling value at 11 times earnings or somewhere near 122-124. This level is entirely possible if there is a correction in Big Oil. Brazil's Petrobras has been the worst-performing major oil company in the world in the past three years. The Brazilian government, its majority shareholders, forced Petrobras to sell natural gas/refined products to the local market at a loss, a political gambit by the populist Workers Party. However, no matter who wins the October election, Brazil could raise petroleum product prices without fear of an immediate political backlash. If President Dilma Rousseff is defeated, Petrobras's current 40 per cent NAV discount to NAV will narrow. In this scenario, the Petrobras ADR could well rise to 22-23, still a 30 per cent NAV discount. The Sad Sack of Big Oil could well sizzle this autumn. Hence this "Samba Trade"!


Khaleej Times

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