Energy stocks have taken a pounding since crude oil prices started falling in July. In virtually every part of the energy business, share prices for the premiere companies are off by as much as 70%.  We have reviewed Exxon Mobil Corp. (NYSE:XOM), Valero Energy Corp. (NYSE:VLO), Schlumberger Limited (NYSE:SLB), Chesapeake Energy Corp. (NYSE:CHK), Kinder Morgan Energy Partners LP (NYSE:KMP), and Kinder Morgan Management LLC (NYSE:KMR) to see which of the majors in each group may offer the best returns or the most safety in 2009.  While the price of oil may be the largest factor, each company has its own merits and pitfalls that could affect shares in 2009.

Will crude prices make a comeback in 2009, dragging along with them thehammered share prices? And which part of the energy sector will do thebest: E&P; refining; services; natural gas; pipelines? 

Here are how the bell weather companies in each area have fared over the last 52 weeks:

                                                             Percent below high
                                      52-week Range   (on 12/9/08)
Exxon Mobil (NYSE:XOM)    $56.51-96.12        17.7%
Valero (NYSE:VLO)              13.94-71.25         74.3%
Schlumberger (NYSE:SLB)    111.95-37.24       65.8%
Chesapeake (NYSE:CHK)      9.84-74.00          81.0%
Kinder Morgan(NYSE:KMP)   35.59-60.89         21.4%

The picture isn’t any prettier when you look at revenue estimates for 2008 and 2009:

                                 Full year 2008 (est)    Full year 2009 (est)
Exxon Mobil                   $485.33 billion          $382.06 billion
Valero                              121.92 billion            96.47 billion
Schlumberger                    27.59 billion             28.99 billion
Chesapeake                      11.02 billion             10.82 billion
Kinder Morgan                   12.84 billion             14.52 billion

What about earnings? Here are current estimates:

                           EPS thru Dec 08   EPS thru Dec 09
Exxon Mobil                    $8.66            $6.62
Valero                               4.38              3.51
Schlumberger                    4.71              4.67
Chesapeake                      3.63              3.10
Kinder Morgan                   2.37              2.40

Finally, here are trailing and forward dividend yields on a static basis:

                    Trailing Annual        Forward Annual
                     Dividend Yield         Dividend Yield
Exxon Mobil       1.10%                     2.10%
Valero                3.10                        3.50
Schlumberger     2.00                        2.10
Chesapeake       2.00                        2.70
Kinder Morgan    8.30                        8.90

We also wanted to look at which factors might be the most important foreach stock.  The obvious angle is which way oil prices go from here andhow high or how low they go.  For prices to go much lower under thecurrent 2008 levels of the low to mid-$40’s per barrel would mean thatthere has been further demand destruction and even much more globalweakness than is expected.  It turns out that oil companies aren’texactly as recession proof as once thought.  If T. Boone Pickens wasright on his prediction of a return to $100.00 oil, then 2009 is going to be another wildyear for energy stocks.

Exxon is expected to suffer from lower crude prices, plain and simple.High crude prices have been the driver of the company’s revenuesearnings for the past couple of years, and now that prices have fallen,revenues will also erode.  The question is what it will be able togenerate in profits and in margins.  The company has a history oflooking differently on a net basis than expected, so maybe more stabilityin oil prices may make this easier.

Although Valero’s dividend promise looks good, its EPS and revenues areexpected to fall next year. Refiners in general benefit from lowercrude oil prices, and the forecast on Exxon’s revenue and EPS indicatesthat no substantial price increases are in the offing. Valero’sdividend yield may be wishful thinking, although even the lowestanalyst estimate on earnings for 2009 gives this one a dirt cheapmultiple ahead.

Oil field services companies such as Schlumberger will follow theE&P companies and it already outlined some of the issues that willaffect its weaker earnings power. If capital expenditure budgetscontinue to be pulled in, services companies face reduced revenues andearnings. Schlumberger would not be immune  regardless of itsglobal dominance. There’s usually a bit of a lag due to the long timeframes, so the first half of 2009 should be better than the second half.

Finally, when a company is suffering from severe financial headaches,like Chesapeake is, not much good is expected. Chesapeake is sellingassets in an effort to raise cash, but this will hurt thecompany’s cash flow, which will lead it to try to sell moreassets, etc. Keeping dividends high will not fool anyone.  The recentcap-ex cuts were well received, so if the company can mind its P’s andQ’s and if natural gas prices stabilize it could offer a great return.Maybe even CEO Aubrey McClendon can start buying back some of his hugestock holdings that he was margin-called out of. 

For 2009, the company’s own numbers say that Kinder Morgan is the placeto be. But that 8.9% dividend yield hides a couple of gotchas. First,because of the structure of master limited partnerships this is pre-taxincome and an investor will be taxed on dividends at the investorsordinary income tax rate. Second, investors need to pay tax in everycountry and state in which Kinder Morgan operates.

A different way to invest in Kinder Morgan is through its managementarm, Kinder Morgan Management (NYSE:KMR). KMR investors participatedirectly in Kinder Morgan earnings by getting distributions in the formof additional units. Earnings are taxed at the capital gains rate andtax filing is much simpler. The forward dividend yield for KMR in 2009is 10.5%, up from 4.8% this year. Even if KMR yields only half theprojection, it’s still better than any of the other sector numberswe’ve looked at here.

All in all, the global economy and the new Democratic administrationand Congress will play a huge role in the overall success of the energysector next year. Unless credit and housing problems and unemploymentcan be solved, the economy will continue its downward slide and therewill be lower demand for energy. That will depress commodity prices,which will hurt services companies, but help refiners a little.Pipeline companies will see lower volumes, but many have a large supplyof cash that will see them through.  If the recession gets worse, orcontinues into 2010, there will be plenty more pain to go around.

Written by Paul Ausick
Edited by Jon Ogg

December 9, 2008

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