By Philip van Doorn, MarketWatch
Getting back to the stock screen, Michael Roomberg, lead portfolio manager of the Miller/Howard Drill Tip to Burner Tip Fund /zigman2/quotes/205804590/realtime DBBEX -0.62% /zigman2/quotes/209745195/realtime DBBDX -0.62% , said he currently owns shares in three of the first five energy companies on the list, but is only particularly enthusiastic about one.
During an interview on July 17, Roomberg said that he seeks to focus more on “volume and activity” than on the price of oil, so that the performance of the fund “will be more closely correlated to rising volume and production” of oil and natural gas. He sees natural gas as an especially important area for investors to focus on over the long term, as it displaces coal.
Roomberg helps manage $4.5 billion at Miller/Howard Investments, including about $100 million for private clients using the firm’s American Energy strategy. The Miller/Howard Drill Tip to Burner Tip Fund follows that same strategy. While it has only $6.5 million in assets, it has a four-star rating (out of five) from Morningstar. Miller/Howard is based in Woodstock, N.Y., and manages about $1.25 billion in its broad energy infrastructure strategy.
Here’s what Roomberg has to say about the five companies, plus two alternates he prefers:
The Miller/Howard fund holds a small position in Halliburton /zigman2/quotes/210488727/composite HAL -0.43% , which Roomberg called “the blue-chip North American land services company.” But he isn’t enthusiastic about the shares over the next 18 months because “the capital discipline among the E&Ps [oil exploration and production companies] is real and spending will come down, which will intensify competitive pressures for Halliburton.”
Shares of Concho Resources /zigman2/quotes/208942254/composite CXO -1.09% trade for about six times estimated Ebitda for 2020, which Roomberg said is “35% below its five-year average.” The Miller/Howard fund owns the stock. “Most important, Concho Resources has some of the best shale acreage, but also the most contiguous,” Roomberg said.
A desire for contiguous property for shale drilling is why Occidental Petroleum /zigman2/quotes/207018272/composite OXY +0.30% trumped Chevron’s /zigman2/quotes/205871374/composite CVX -0.53% offer to acquire Anadarko Petroleum in May, he said. Anadarko’s shareholders will vote on the $38 billion deal on Aug. 8.
“We think Concho, as the Permian Basin begins to consolidate, could be an acquisition candidate,” Roomberg said.
Roomberg sees Noble Energy /zigman2/quotes/208747379/composite NOBL +0.24% as a potential “value trap” because of political uncertainty in the Middle East and because of relatively high debt to Ebitda.
Roomberg said Miller/Howard recently sold its shares of Diamondback Energy /zigman2/quotes/201200230/composite FANG -2.46% , “believing there was better opportunity elsewhere.” The company has “good well results” along with “a good balance sheet and cash flow,” he noted, “but they don’t have the contiguous acreage that is important as the Permian consolidates.”
He prefers Continental Resources /zigman2/quotes/200740136/composite CLR -2.58% , which he said “is not hedged.” That means the upside to its stock is tied to gains in oil prices. It is a more speculative play than Diamondback; however, the company’s wells are highly productive compared with those of its peers, and “they are buying back a third of their shares,” he said.
Miller/Howard owns a small position in Marathon Petroleum /zigman2/quotes/209634297/composite MPC +1.62% and the stock’s 3.8% dividend yield is “covered by cash flow two-to-one,” Roomberg said. But in the refining space he prefers Valero Energy /zigman2/quotes/200735463/composite VLO +1.07% , which has an estimated free cash flow yield of 10.6% that easily covers a dividend yield of 4.3%.
A company’s free cash flow is its remaining cash flow after planned capital expenditures. This is money that can be used to pay dividends, buy back shares, make acquisitions or for other purposes. If you take a company’s free cash flow (or estimated free cash flow) per share and divided it by the share price, you have the free cash flow yield, which can be compared with the dividend yield to see if there is “headroom” to support or increase the dividend payout.
Here are dividend yields for the seven companies Roomberg discussed, along with their dividend yields and his free cash flow estimates for the next 12 months, based on data provided to him by Thomson Reuters:
|Company||Ticker||Dividend yield||Estimated free cash flow yield||‘Headroom’|
|Halliburton Co.||/zigman2/quotes/210488727/composite HAL||3.1%||5.2%||2.1%|
|Concho Resources Inc.||/zigman2/quotes/208942254/composite CXO||0.5%||5.0%||4.5%|
|Noble Energy Inc.||/zigman2/quotes/210375673/composite NBL||2.3%||0.0%||-2.3%|
|Diamondback Energy Inc.||/zigman2/quotes/201200230/composite FANG||0.7%||5.4%||4.7%|
|Marathon Petroleum Corp.||/zigman2/quotes/209634297/composite MPC||3.8%||7.6%||3.8%|
|Continental Resources Inc.||/zigman2/quotes/200740136/composite CLR||0.5%||5.4%||4.9%|
|Valero Energy Corp.||/zigman2/quotes/200735463/composite VLO||4.3%||10.6%||6.3%|
|Sources: FactSet, Miller/Howard Investments|
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