Investors seeking value could start at looking at beaten out-of-favor companies in the energy sector. Companies making the headlines offer a glimpse on their future prospects.
BP plc (ADR) (NYSE:BP) for instance, had its reputation tarnished after the spill in the Gulf of Mexico. Even with all litigation costs accounted for, investors are assigning a low valuation to its shares. BP plc (ADR) (NYSE:BP) trades with a forward P/E of 8 and are valued just 10% above its book value of $37.71. Looking back at its fiscal year results since 2009 (but excluding fiscal 2012), there are some weaknesses. It is cash flow:
| 12/31/2009 | 12/31/2010 | 12/31/2011 | |
| Net Cash From Investments | -18,133.00 | -3,960.00 | -26,633.00 |
| Other Cash Inflow Investments | 577 | 501 | 301 |
| Net Cash From Op Activities | 27,716.00 | 13,616.00 | 22,154.00 |
| values in millions USD | |||
Data Source: www.kapitall.com
Weakening cash flows in BP plc (ADR) (NYSE:BP) is expected as the company sells down assets and reserves funds for litigation settlement. In the interim, investors get paid a dividend yielding 5.31%.
Risks could hurt BP plc (ADR) (NYSE:BP) shares in the short-term. A recent court ruling could mean that BP has to provide higher compensation for the oil spill than originally thought. BP plc (ADR) (NYSE:BP) detailed the ruling in its annual filing.
Also associated to the Gulf of Mexico spill is Transocean LTD (NYSE:RIG) . Both Transocean and Haliburton were being accused by the Justice Department of gross negligence in late-February 2013. The company is in the headlines again after the board recommended re-initiating dividends at a rate of $2.24 per share. Activist investor Carl Icahn wanted $4 per share. The company reported quarterly earnings of $0.91 per share on revenue of $2.32 billion. Special gains of $0.35 per share came from favorable tax treatment. Discontinued operations also helped earnings. Transocean LTD (NYSE:RIG) sold down its shallow water rigs.
A recent lower-court ruling in a New Orleans appeals court favored BP related to the Gulf spill. BP plc (ADR) (NYSE:BP) will have access to $750 million in Transocean LTD (NYSE:RIG)’s insurance.
Overall, Transocean LTD (NYSE:RIG) is shoring up its balance sheet. The company aims to reduce debt by $1 billion by the end of the year 2014. The company is already obligated to pay debts totaling $1.36 billion in that time frame.
Talisman Energy Inc. (USA) (NYSE:TLM) held an investor day open house in Toronto. Its valuation does not suggest the company is a value play at first. The company lost money last year, and is valued at 53 times its forward P/E. Shares pay a dividend yielding 2.2%. Talisman Energy Inc. (USA) (NYSE:TLM) once rolled with the good times, when it had interests in the Sudan. Since them, the company lost its way. The company is an Exploration & Production (or E&P) play, but has been doing something quite different: selling down assets. Talisman Energy Inc. (USA) (NYSE:TLM) said at the open house that it aims to sell between $2 billion and $3 billion over the next few months in 2013. Divestitures include projects in Duvernay, in the North Sea, and in the Montney.
Talisman Energy Inc. (USA) (NYSE:TLM) had explorations of up to 25% allocated for large capital programs. The company now wants to bring it down to 10% to 15%. In addition, the company is focusing on low to medium risk prospects.
Shares traded at around $11 in late-2013, and closed above $12 recently. Shares are 30% above a 52-week low, but are 20% below a 52-week high.
Talisman Energy Inc. (USA) (NYSE:TLM) could be a company for investors to consider buying. A reduction in aggressively taking on E&P activities will improve the balance sheet, reduce debt, and increase cash flow per share.
Foolish Bottom Line
Many energy companies appear to be of value, when looking strictly at their depressed share price. Investors taking a closer examination in the companies will realize that cash flows are not so solid. The companies aiming to boost cash flows and pay down debt will likely see their share values rise. Energy demand could weaken, but a healthier balance sheet limits downside in the companies mentioned.
The article Time To Consider These 3 Energy Companies originally appeared on Fool.com and is written by Chris Lau.
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