Despite Ongoing Operational Improvements, Cosan Still Undervalued

Following and modeling Cosan Ltd. (CZZ) is a little like training for endurance sports - you spend a lot of time while you're doing it wondering why you're bothering to do it. After all, there are two share classes, a somewhat complicated holding company structure, and many commodity moving parts to account for in an analysis. With the shares up more than 30% over the last year and close to 250% from the 2015 lows, though, I think you can certainly argue that there has been some gain for shareholders willing to take on that pain. Better still, I continue to see upside in these shares from both operational improvement and a shrinking discount to the underlying value.

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Despite Ongoing Operational Improvements, Cosan Still Undervalued

Cosan Buoyed By Better Operating Results And Optimism On Brazil

If you really hate your brain and want to punish it, dig deep into Cosan Ltd (NYSE:CZZ). While this Brazilian-American conglomerate has a lot of positives going for it, including a strong position in ethanol and sugar production, fuel distribution, and rail in Brazil, it also has a complex holding company structure, a lot of debt, and a lot of moving parts to factor into any sort of valuation analysis.

My last update on Cosan took place right around the period of peak pessimism on Brazil, with both the stock market and currency around five-year lows. Since then, not only has Cosan seen stronger markets for ethanol and sugar, but more optimism about a recovery in Brazil and a stronger currency. The shares have soared more than 100% since my last update and yet I still think there could be upside left.

Adjusting for the company's capex plans, the recapitalization of Rumo, and the exchange rate, my fair value rises to around $11, suggesting meaningful upside is still possible. Keep in mind, though, that what the currency markets give they can also take back and Cosan is a high-beta play on Brazil, not to mention a complicated company in its own right.

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Cosan Buoyed By Better Operating Results And Optimism On Brazil

Seeking Alpha: Ultra Petroleum Continuing To Yo-Yo Between Gloom And Glee

Even by the elevated standards of independent exploration and production companies, Ultra Petroleum (NYSE:UPL) seems to more often swing between doom-and-gloom bearishness and gleeful bullishness than the typical E&P stock. A debt-loaded balance sheet, so-so debt-adjusted production growth, and "okay" assets may explain some of the negativity, but Ultra's production growth hasn't really been that bad, the cash costs are competitive, and the company is executing in its oil-rich Uinta acreage. Like many E&Ps, Ultra Petroleum looks undervalued on a NAV basis (though rising costs are an issue to watch there), but the EBITDA-based approach doesn't suggest the same level of near-term opportunity.

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Ultra Petroleum Continuing To Yo-Yo Between Gloom And Glee

Seeking Alpha: Total SA's Ambitious Goals Are A Good News/Bad News Proposition

If French integrated oil company Total SA (TOT) can do what management says it can, this could be one of the better-performing energy majors over the next five years, even with a strong 50% run over the past year that is second only to Statoil (STO), among the majors. The catch there is that what management is looking to do is not going to be easy - post one of the best five-year production rates while reducing capex, execute on multiple high-risk projects, and turn the downstream operations around so as to generate double-digit returns on capital. Although I'm not as bullish on Total's prospects as its management team, I do nevertheless think this is one of the more attractive European majors today.



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Total SA's Ambitious Goals Are A Good News/Bad News Proposition

Seeking Alpha: Kraton Offers A Good Story But Some Valuation Questions

Kraton Performance Polymers (KRA) is the kind of stock that gives investors early gray hairs. A cyclical, seasonal chemical company with significant raw material risk, the company also has uncommonly high share in its markets. I like the company's history of innovation and product development, not to mention the major synergy potential of the proposed merger with LCY Chemical's SBC business. The cyclicality of the business make discounted cash flow trickier, while reasonable debate on the "right" EV/EBITDA multiple could lead to a fair value between $22 and $3

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Kraton Offers A Good Story But Some Valuation Questions

Seeking Alpha: Cosan's Value Is Worth The Hassle

I would imagine that those investors tending towards the OCD side of the spectrum who look into Cosan Ltd. (CZZ) will eventually have wisps of smoke coming out of their ears. Not only does Cosan Ltd. have a convoluted ownership structure (Cosan Ltd. technically owns about 62% of Cosan SA (CSAN3), and Chairman Ometto owns more than 40% of Cosan Ltd.), but the basic business of Cosan is confusing as well with its mix of JVs and wholly-owned operations.

What I believe is a lot simpler to understand is the value proposition. Although Cosan Ltd. routinely trades at a discount of 15% to 20% of the implied value of its Cosan SA position, Cosan Ltd. is the one that most U.S. investors can own and Cosan Ltd. shares themselves appear to be about 30% undervalued. Cosan is vulnerable to Brazil's opaque regulatory policies in multiple ways and Cosan Ltd. is vulnerable to currency moves, but I believe there is significant value in a company that is Brazil's largest sugar and ethanol producer and a significant player in fuel distribution (gas stations), natural gas distribution, and commodity logistics.

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Cosan's Value Is Worth The Hassle

Seeking Alpha: OMV's Transformation Should Unlock Meaningful Value

One of the most rewarding things about writing about stocks is when you write a piece, make certain specific predictions, and then see those come to fruition. In contrast, one of the most frustrating things is to have a piece all lined up and ready to go and then see one of your big predictions come true before your piece gets published. That has happened to me now on OMV (OMVKY.PK), as the company announced Monday that the company had reached a potentially transformative $2.7 billion deal with Statoil (STO).

The good news is that my basic thesis on OMV still holds - OMV looks like a significantly undervalued European energy major with catalysts to drive better performance in the coming years. Not only does the acquisition of North Sea assets from Statoil significantly improve the odds that the company will meet its long-term production growth goals (something the Street was incredibly skeptical about), but OMV remains a strong free cash flow-generating major with a low breakeven price and capacity for additional farm-ins as circumstances allow. All told, I believe these shares should trade more than 30% higher than they do today.

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OMV's Transformation Should Unlock Meaningful Value

Investopedia: Chevron Deserves A Better Valuation

Like other energy majors, Chevron (NYSE:CVX) is trapped in a Wall Street catch-22. Analysts and investors are quick to complain about the low expected production growth rates in the sector, but they complain even louder when the companies announce higher capex budgets to exploit and develop their sizable reserves. Even so, Chevron looks too cheap when compared to peers like Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP). Sizable investments have pressured recent returns, but the long-term growth and value-creation potential at Chevron looks better than just worthwhile.

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Commodity HQ: 5 Of The Biggest Oil Finds In History

Oil makes the world go ’round, and finding more oil is one of the principal goals of multinational energy giants like Exxon Mobil (XOM), British Petroleum (BP) and Chevron (CVX). Unfortunately, it has become harder and harder to find fields that really move the needle for corporate or national reserve totals. Nevertheless, just because it is difficult does not mean it is impossible, and investors can look back to some notable successes in the history of the oil industry.

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5 Of The Biggest Oil Finds In History

Commodity HQ: A Deeper Look At Iran's Commodity Industry

Iran is quite possibly one of the best-known and least-known countries in the world for American investors. Tense, if not outright hostile, relations between Iran and many Western countries have kept it in the news, but relatively few investors seem to appreciate Iran’s size, demographics (it’s a very young country), and economic prospects. In recent years sanctions have had a massive impact on Iran’s economy, but it remains a major player within OPEC and in the global energy market.

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A Deeper Look At Iran's Commodity Industry

Commodity HQ: Stocks To Buy For Hyperinflation

With the Federal Reserve firing up the presses for a third round of quantitative easing, it’s only a matter of time before more talk of imminent hyperinflation pops up. While calm discussions on the prospects of hyperinflation are rare (and there’s often a tinge of hysteria or paranoia around the topic), the reality is that the U.S. does have some disturbing trends working against it in terms of demographics, debt/deficits, and a policy of easy money that debases the fiat currency.



What’s more, thumbing through the history books shows that periods of extreme inflation or hyperinflation (definitions vary) are not all that uncommon around the world. Post-World War I Germany is probably the most oft-cited example, but a range of countries including Greece, Russia, Argentina, China, Brazil, and Zimbabwe (most recently) have seen stretches of inflation severe enough to call it hyperinflation.

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Investopedia: At The Right Price, Albemarle Would Be A Great Idea

There's a big difference between commodity chemical companies and specialty chemical companies - both can make you money, but companies with more of a commodity orientation have to be sold more nimbly. That's not to say, however, that investors can just buy a company like Albemarle (NYSE:ALB) whenever they may like. While this is a very interesting and well-run chemical company, today's valuation doesn't offer much discount despite multiple challenges to the business.

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Investopedia: The Market Is Already Expecting Big Things At Dril-Quip

There's ample business to come in offshore energy development, what with the huge discoveries of oil and gas in the waters off Brazil, and both East and West African countries. The question, however, is how much of that is already reflected in the valuation of equipment companies such as National Oilwell Varco (NYSE:NOV), Aker Solutions (OTC:AKKVF) and Dril-Quip (NYSE:DRQ). In the case of the latter, it looks like quite a lot.

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Investopedia: Has Ultra Petroleum Seen The Worst?

Maybe the worst question an investor can ask about a stock or sector is "how much worse can it get?," as the answer is often something along the lines of "a lot." That seems like a relevant point when considering Ultra Petroleum (NYSE:UPL) - a natural gas-focused exploration and production (E&P) company that has long been a top-notch operator, but has suffered from rock-bottom gas prices. It's probably true that higher natural gas prices are inevitable as export-oriented liquefaction facilities come online and more energy consumption is shifted to gas, but that's a multi-year process that still leaves ample room for volatility in these shares.

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Investopedia: Total Has More To Lose With Falling Oil Prices

Major oil and gas companies are clearly suffering as oil prices decline. While some investors look at this situation as a bargain-in-the-making on the basis of a never-ending demand for oil around the world, the truth is a little more nuanced. Oil demand does indeed look solid on an intermediate-term basis, but many majors are finding that they have to spend enormous amounts of money to harvest their reserves. Consequently, today's oil prices do start to change the expected path for project development and dividend payouts.

Total (NYSE:TOT) is one of those companies that looks vulnerable to the squeeze play. Not only does Total have a sizable downstream (refining) business that drags on results, but the upstream operations have some questions around them as well. With so much expected production tied to areas with political risks and/or advanced technological needs, Total has a has a problem with sub-$90 oil.

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Investopedia: Debt Complicates The Ultra Petroleum Waiting Game

There's not much more digital ink to be spilled on the state of the natural gas environment. Massive supply increases from basins like the Marcellus have pushed prices down to uneconomical levels, and those producers who can are switching over from natural gas to oil and liquids. Unfortunately, while Ultra Petroleum (NYSE:UPL) is one of the best-run natural gas companies, the company's reserve base is almost completely natural gas and potential declines in production and profits could pressure liquidity in the coming year.

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Seeking Alpha: BP May Be Cheap, But There's A Lot Of Work Left To Do

It wasn't all that long after the Macondo disaster that investors began speculating as to whether BP (BP) shares had been punished too much and represented a good long-term bargain. While the shares certainly are considerably higher than their worst levels of the disaster, the stock has been range-bound for the better part of 18 months. Although BP does look cheap relative to other major oil and gas names, management is going to have to start executing better for that valuation gap to shrink.

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BP May Be Cheap, But There's A Lot Of Work Left To Do

Seeking Alpha: Should Chevron Management Sweeten What Is Already A Solid Growth Story?

Unlike ConocoPhillips (COP), which I more or less blasted a week ago, Chevron (CVX) is a major oil company with a pretty interesting near-term profile. Although growth in the first quarter was not exactly torrid, the outlook here for production growth in the next three to five years (particularly oil/liquids production) is one of the best among the majors. Better still, this company has a clean balance sheet, solid profitability, and a focus on production sources that other companies tend to avoid.

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Should Chevron Management Sweeten What Is Already A Solid Growth Story?

Investopedia: Innospec Might Be A Name To Watch In Specialty Chemicals

It seems a little strange that a specialty chemicals business with $750 million in annual sales and strong returns on capital would be a virtual unknown, but that's the case for Innospec (Nasdaq:IOSP). Although this is a company with input cost exposure and somewhat volatile free cash flow, investors may want to keep an eye on this name as a potential value in the sector.

Addressing Huge Markets for Specialty Chemicals  
Broadly speaking, the markets for fuel additives and chemicals used in personal care products are huge. While there are many competitors, including major chemical companies like DuPont (NYSE:DD), Dow (NYSE:DOW) and BASF, this is nevertheless a market where offering the right proprietary product can drive premium pricing and reliable business.

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Investopedia: Eni Hoping To Be An African Queen

Much like its home country, Italian energy Eni (NYSE:E) needs to rethink its approach and restructure its operations. While the company has a valuable growth-oriented exploration and production business (centered on Africa), overall performance has been held back by a collection of structurally uncompetitive downstream operations. While valuation is close to attractive, Eni is a stock that will need some time to work out.

A Tough 2011 Breaks a Strong Streak  
Eni had built a reputation as a fairly reliable under-promise/over-deliver company that routinely delivered results slightly above expectations. Although that technically continued in the fourth quarter as adjusted income was 3% above expectations, it was a low-quality beat and underlying results actually missed most sell-side estimates by about 5%.

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