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Sunday, January 31, 2010

Two Stocks I Like - Oil and Gas Industry

When it comes to stocks, I’m of the Peter Lynch School, which says that you shouldn’t purchase a stock unless you can, a) rationalize your purchase in few sentences, and b) draw what the company does with a crayon. These companies fit the bill.

I have no idea whether these stocks will go up or down in the next 6 hours, days, or weeks, and don’t know anyone who does. My intention is to hold them (I own both) until at least the peak of the next market cycle, or until the company proves to be something other than what I thought (for example, the dreaded words, “accounting irregularities.”)

Tidewater (TDW) – Tidewater is an offshore oil and gas drilling support-company that owns a fleet including 126 new vessels, making it one of the youngest fleets in the industry. Its ships have low downtime and an excellent safety record. The company has almost no debt, great return on equity, and the stock price is cheap – single digit P/E and close to book value. The company has been buying back shares.

Because Tidewater’s worldwide fleet is mobile, they can sail to wherever the work is. This company is also a manly man stock, with photos of oceangoing vessels all over the annual reports. While this latter point isn’t actually a reason to buy, I enjoy it nonetheless.

Barack Obama recently expressed an interest to expand offshore drilling in the United States: this is not a sufficient reason to buy Tidewater. Buy a stock because the company is great -- not because of a politician, the weather, interest rates, or any other transitory reason.

TDW Statistics (as of writing):
Price $46.81
P/E 6.67
Return on Equity 16.75%
Dividend Yield 2.12%


Chevron (CVX) – one of the world’s largest and most recognizable energy companies. Chevron owns assets worldwide including Australian natural gas, Canadian oil sands, offshore sites in Brazil, and sites in Nigeria, Kazakhstan, and Tahiti, amongst others.

Recently, Chevron announced that its earnings had declined due to losses from weak refining prices in 2009: something I believe is unlikely to be repeated in the foreseeable future. Chevron’s debt level is low (lower than most energy companies), it has actively been buying back shares, the stock is reasonably priced, and its return on equity is excellent. In addition, its international operations help prevent currency shock.

CVX Statistics (as of writing):
Price $72.80
P/E 11.83
Return on Equity 13.86%
Dividend Yield 3.69%


Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.