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Are Tullow Oil plc, Anglo American plc & SOCO International plc Really Worth Less Than In 2005?

The shakeout in the commodity market is becoming brutal. Shares in some major firms are now worth less than they were 10 years ago, in 2005.

Here at the Fool, we generally advocate long-term investing, but shareholders in Tullow Oil (LSE: TLW), Anglo American (LSE: AAL) and SOCO International (LSE: SIA) may rightly feel this approach has not worked for them:

Share price

15 August 2005

19 August 2015

Tullow Oil

205p

203p

Anglo American

1,470p

725p

SOCO International

150p*

132p

*Adjusted for 2010 4:1 share split

The biggest loser here appears to be Anglo American, where shareholders are 50% down on ten years ago.

At Tullow and SOCO, dividends and cash returns may mean that investors are still in the black. However, I suspect that when inflation and dealing costs are factored in, it’s still a dismal picture.

The other side of the coin, of course, is that these companies’ assets and liabilities have changed over this time, as have their earnings. Tullow, for example, has more oil and gas, but also more debt.

Are any of these stocks compellingly cheap at today’s prices?

Tullow Oil

Tullow shares rose from 43p in 1995 to an all-time high of 1,511p in February 2012, before beginning a dramatic descent that has wiped nearly £12bn off the firm’s valuation in just 3.5 years.

 

August 2005

August 2015

Market cap

£1.1bn

£1.9bn

Enterprise value (market cap plus net debt)

£1.25bn

£4.2bn

2P reserves (millions of barrels of oil equivalent)

173.36 mmboe

329.2 mmboe

EV/2P boe

$11.27

$19.9

Although Tullow’s market cap is now comparable to 2005, the firm’s net debt has risen significantly, giving the firm a much higher enterprise value. Tullow’s reserves have also risen during this period, but not enough to counteract this big rise in debt.

As a result, Tullow now has an EV/2P valuation of $19.90 per barrel of oil and gas reserves. That’s 76% higher than in 2005.

Although Tullow does have significant undeveloped assets, which are not reflected in its reserves, I’m going to steer clear of Tullow for a little longer. I’m not sure we’ve seen the bottom yet.

Anglo American

These numbers highlight the cyclical nature of the mining business:

 

August 2005

August 2015

Market cap

£22.2bn

£10.2bn

Enterprise value (market cap plus net debt)

£26.7bn

£18.8bn

Adjusted earnings per share

138p

91.5p

Adjusted pre-tax profit

$4.6bn

$2.5bn

We are currently at a fairly low point in the cycle, in my view, although we may not yet be at the bottom. Despite this, I think Anglo shares look a fairly reasonable buy after recent falls. The current share price gives a 2015 forecast P/E of 12, falling to a P/E of 10 for 2016.

Income hunters should probably treat Anglo’s prospective yield of 7.1% with caution, however. If current market conditions persist into 2016, I’d expect this payout to be cut.

SOCO International

SOCO shareholders received a painful blow in March, when the firm admitted that its proven and probable reserves had been downgraded from 125.1 mmboe to just 40.8 mmboe. This reduction was due to lower oil and gas prices making the economic viability of some of resources uncertain.

SOCO shares nosedived and have yet to recover.

 

August 2005

August 2015

Market cap

£105m

£432m

Enterprise value (market cap plus net debt)

c.£75m

£370m

2P reserves (millions of barrels of oil equivalent)

133.2 mmboe

40.8 mmboe

EV/2P boe

$0.90

$14.2

As the figures above show, the firm looks considerably more expensive on an EV/2P basis than it did in 2005. Without further research, I’m not sure whether the balance of oil and gas in SOCO’s reserves has changed over this period, which might help explain the extreme valuation difference between 2005 and 2015.

Regardless of this, SOCO’s EV/2P of $14.2 per barrel doesn’t look especially cheap to me. With the dividend expected to fall by 50% in 2016, I wouldn’t rush to buy quite yet.

However, the problem with cyclical stocks is that you cannot usually identify the peaks and troughs until they have passed.

That's why it makes sense to include some defensive stocks in your portfolio.

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Roland Head owns shares of Anglo American. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.