Valuentum Exclusive Analysis for the Discerning Investor

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Oct 15, 2020

Our Thoughts on the Potential Acquisition of Concho Resources by ConocoPhillips
Image Source: ConocoPhillips – November 2019 Annual & Investor Meeting Presentation. According to Bloomberg, the super-independent ConocoPhillips is currently talking with Concho Resources about acquiring the company. We do not expect that such a deal will come with a significant premium, and furthermore, and we expect that such a deal will likely be funded with equity. Our reasoning is underpinned by recent M&A activity in the oil patch, such as the all-stock acquisition of Noble Energy by Chevron Corporation through a ~$5 billion deal that was completed in early-October. That deal involved Chevron paying a ~12% premium (based on ten-day average closing stock prices) at the time of the announcement, though please note shares of Noble Energy had cratered beforehand indicating that Chevron did not have to pay up for the company. Noble Energy, like Concho Resources, also had a significant position in the Permian Basin (though its Mediterranean assets were Chevron’s main target, in our view). We covered that deal in great detail. As it concerns our view that ConocoPhillips would likely use equity instead of cash to acquire Concho Resources (should such a deal materialize), that is largely due to ConocoPhillips’ sizable net debt load at the end of June 2020 and its inability to generate meaningful free cash flows in the current pricing environment for raw energy resources. Additionally, Concho Resources had a net debt load at the end of June 2020 and is also unable to generate meaningful free cash flows in the current environment. The oil patch is contending with serious financial constraints and all-stock acquisitions/mergers with minimal premiums are likely going to continue being the norm for some time.

Oct 2, 2020

Our Thoughts on the Oil & Gas Industry
Image Shown: Crude oil prices, measured by the WTI benchmark, plummeted during the initial phases of the COVID-19 pandemic and have yet to fully recover. Declines in global crude oil prices have depressed prices for natural gas, natural gas liquids, and liquified natural gas as well. We expect that it will take some time for the oil and gas industry to truly recover, and hefty net debt loads combined with onerous dividend obligations are making that a very tough task. Juicy dividend yields are a sign of the headwinds facing the oil and gas industry and are not a sign of strong underlying strength in those firms that are paying out generous dividends. Most of the juicy dividend yields within the energy space are a sign of the stress facing those companies and the industry at-large, and we caution that the chance other oil majors follow Shell and BP in cutting their payout remains very likely. For instance, Exxon Mobil’s payout is simply not well-covered in the current raw energy resources pricing environment and the firm is taking on a lot of debt to cover those obligations. Chevron Corporation’s payout is also on shaky ground as it generated negative free cash flows during the first half of 2020 while carrying a large net debt load at the end of June, though like Exxon Mobil, Chevron’s management team has stuck with its current dividend policy so far. Like Shell, Chevron also grew its natural gas and LNG business meaningfully over the past few years, but that strategy did not pan out as intended.

Sep 8, 2020

Dividend Growth Selection in a Low Yield Environment
Image Source: EpicTop10.com. Management's willingness to pay is critical, so an understanding of how dividend growth has been the past few years is very important, but when we look for fantastic dividend growth ideas for the future, we also want to make sure that the management team has the capacity to keep raising the dividend--meaning there's so much more to dividend growth assessments than backward-looking analysis. For starters, we want our long-term dividend growth ideas to have strong competitively-advantaged business models, solid secular growth trends or recession-resistant characteristics, impressive balance sheets (sometimes and preferably with hefty net cash positions) and growing future expected free cash flows (strong Dividend Cushion ratios).

Sep 3, 2020

Schlumberger and Liberty Oilfield Services Make a Deal
Image Shown: Schlumberger NV is combining its OneStim business with Liberty Oilfield Services Inc. The picture above is an overview of the combined company on a pro forma basis. Image Source: Liberty Oilfield Services Inc – Schlumberger to Contribute OneStim to Liberty IR Presentation. On September 1, Schlumberger and Liberty Oilfield Services announced that Schlumberger would combine its onshore hydraulic fracturing business in the US and Canada, OneStim, with Liberty Oilfield Services. That includes Schlumberger’s pressure pumping and pumpdown perforating businesses in the relevant regions, and its frac sand business in the Permian Basin (West Texas and Southeastern New Mexico). In return, Schlumberger is getting a 37% equity stake in Liberty Oilfield Services (on a pro forma basis) which primarily offers pressure pumping and other oilfield services to upstream companies operating in onshore US markets. The day the news broke, shares of LBRT were up 36% during normal trading hours while shares of SLB were down 1%, as investors clearly saw Liberty Oilfield Services as the big winner from this industry consolidation.

Sep 1, 2020

Valuentum Website Overview
Overview of the key features of www.valuentum.com (03:55). Valuentum (val∙u∙n∙tum) [val-yoo-en-tuh-m] Securities Inc. is an independent investment research publisher, offering premium equity reports, dividend reports, and ETF reports, as well as commentary across all sectors/companies, a Best Ideas Newsletter (spanning market caps, asset classes), a Dividend Growth Newsletter, modeling tools/products, and more. Independence and integrity remain our core, and we strive to be a champion of the investor. Valuentum is based in the Chicagoland area. Valuentum is not a money manager, broker, or financial advisor. Valuentum is a publisher of financial information.

Aug 14, 2020

Our Thoughts on Chevron Buying Noble Energy
Image Shown: An overview of Chevron Corporation’s all-stock acquisition of Noble Energy Inc that was announced in July 2020. Image Source: Chevron Corporation – July 2020 Noble Energy Acquisition Presentation. On July 20, Chevron Corp announced it was acquiring Noble Energy through a $5.0 billion all-stock transaction, or $13.0 billion when factoring in net debt and the book value of non-controlling interests. Shareholders of Noble Energy will receive approximately 0.12 share of Chevron for each share of Noble Energy. At the time the deal was announced, shareholders of NBL were receiving a ~12% premium based on the ten-day average closing stock prices. Chevron intends to issue ~58 million shares to cover the deal, keeping in mind the firm had approximately 1.85 billion shares outstanding on a weighted-average diluted basis as of the second quarter of 2020. The deal is expected to close during the fourth quarter of this year and is forecasted to generate $0.3 billion in annualized run-rate cost synergies one year after closing.

Jul 22, 2020

Second Quarter Earnings Roundup
The figure above shows the performance of the simulated Best Ideas Newsletter portfolio from inception May 17, 2011, through December 15, 2017, relative to its declared benchmark, the S&P 500 (SPY), on an apples-to-apples basis, with dividends collected but not reinvested for both the newsletter portfolio and the SPY, as reported in the monthly newsletter. The simulated Best Ideas Newsletter portfolio outperformed the S&P 500, including reinvested dividends in the benchmark, since inception (May 17, 2011) and since the inaugural release of the newsletter (July 13, 2011) through the end of the measurement period (December 15, 2017). The results are hypothetical and do not represent returns that an investor actually earned. Past results are not indicative of future performance.

Jul 9, 2020

Update on Valuentum's Research
The markets, especially the NASDAQ, have been powering ahead, and we maintain our bullish long-term stance on equities. As you're well aware, the stock market is not the economy, and stocks are long-duration financial instruments (i.e. forecasts about the long term impact the price today). Fed and Treasury actions have inflated the longer-duration components of intrinsic value, more than offsetting in most cases the implications of a weak economy/earnings in the near term.

Jun 16, 2020

Reiterating Our Bullish Long-Term View on Stocks
Image: The NASDAQ 100 Index remains resilient, bouncing off support, after breaking out to new highs recently. Some of our best ideas are included in the NASDAQ 100, and our favorite concentrations include exposure to big cap tech and large cap growth. We continue to be bullish on equities for the long run. In addition to unlimited quantitative easing and "whatever it takes, squared" Fed policy, today, June 16, the Trump administration announced that it is weighing a $1 trillion stimulus bill to help support the economy. While uncertainties remain regarding specifics of the bill (it might include state assistance, extension of unemployment benefits, etc.), the move is consistent with the outsize spending we expect to further bolster the bull case, "ICYMI -- Stay Optimistic. Stay Bullish. I Am." We continue to emphasize that, in light of unlimited QE and runaway fiscal stimulus, the longer-duration components of intrinsic values are expanding considerably, and as a result, fair values, themselves, are actually rising during this recession and pandemic [a good estimate of the value of the S&P 500 today may be between 3,530-3,920, as outlined in the following: "Scribbles and More Newsletter Portfolio Changes.]."

Jun 16, 2020

Exxon Mobil Puts on a Brave Face
Image Source: Exxon Mobil Corporation – November 2019 Guyana IR Presentation. Near-term oil prices and most importantly, the oil price futures curve, have improved materially since just a couple of months ago when it looked like the sky was falling. For the first time ever, WTI turned negative in April 2020 for physical deliveries due May 2020 of light sweet oil to Cushing, Oklahoma, as storage options were limited (and arguably, many speculators had jumped into the market not fully aware of the risks they were taking on). Exxon Mobil Corp has seen its share price recover considerably since the drop, though we caution that management’s commitment to the dividend will prove a hard task if things do not improve materially in the short-term. As of this writing, near-term futures for WTI and its international counterpart Brent are trading near $40 per barrel. In the face of COVID-19, low raw energy resource prices (Exxon Mobil’s upstream operations form its largest single business segment), and subdued demand for refined petroleum and petrochemical products (from gasoline to plastics) have significantly weakened Exxon Mobil’s cash flow profile. The ongoing coronavirus (‘COVID-19’) pandemic has shaken energy markets to their core in ways we have not seen ever before. Shares of XOM yield ~7.4% as of this writing. We give Exxon Mobil a Dividend Cushion ratio at 0.2, though its Dividend Safety rating is “GOOD” given the company’s ability to tap capital markets, especially debt markets as the oil giant carries high quality “A-rated” investment grade credit ratings. There is a limit to how much debt Exxon Mobil can take on to cover its dividend obligations, however, which we will cover in greater detail in this article.