As the ASX World Cup heads into week two, a number of teams are emerging as frontrunners in their pools. In one of the most exciting matchups, the winners from their respective matches from last week, Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) square off in what looks to be an epic battle.

Pre-match commentary and stats

It's been a pretty frantic week for Woodside, with the recent announcement that its major shareholder, Shell Energy Holdings Australia Ltd will be selling down its majority stake, with 9.5% to be sold to institutional investors at $41.35 per share. The remaining 9.5% stake will be extinguished via a share buyback at the cut rate price of $36.49 per share (a 14% discount to the VWAP over the prior five-day trading period). The company estimates that this transaction will be 6% EPS accretive. Although this does seem to be quite a good deal, it could see Woodside taking on an additional US$2.68 billion in debt to fund the deal which may be some cause for concern.

Some commentators have also questioned the validity of Woodside's buyback of Shell's stake given other shareholders may have benefited just as greatly from alternative actions, and with a higher EPS accretion than the (estimated) 6% that this transaction is to generate. Management's response has been that the Shell transaction was struck at the maximum 14% discount to the VWAP and that this has effectively dealt with the major shareholder overhang issue.

As the match begins, Woodside goes on the offensive with a strong Net Profit Margin of 28.3% (slightly less powerful than prior matches given additional finance costs associated with the share buyback debt), causing Santos to lose ground, and it is left reeling given its significantly weaker Net Profit Margin of 14.1%.

Game On 

It seems that Woodside is pushing through the pain with its net debt to capital (gearing) ratio getting a drubbing from the recently announced share buyback (potentially fully funded by debt), moving from 9.2% to 25.2%. Despite the significant increase, Woodside's captain sees this as a good play given this is still within its target gearing range and it looks like its credit rating will be unaffected. Santos, with its equivalent ratio of 33.4% cannot compete, and Woodside punches through a snappy goal.

Woodside: 1

Santos: 0

Although it seems to be a woeful start for Santos, a change in strategy seems to be giving them renewed energy, with an enterprise value to proven and probable reserves (EV/2P) ratio of 13.84 blitzing past Woodside's 24.62. Santos scores an equaliser and the crowd goes wild!

Woodside: 1

Santos: 1

It seems that Santos is on a roll, and charges through with a reserves life of just under 27 years, with Woodside unable to respond adequately with a relatively paltry 16 years. Santos strikes again to take the lead, with questions now being raised about where Woodside's growth is going to come from, given its recent pull-out from the Israeli Leviathan field project.

Woodside: 1

Santos: 2

As we near the end of the match, it appears that Santos has run a little too hard and is finding it difficult to maintain its blistering pace. Its (trailing) price to earnings ratio of 26.8x is looking a little expensive, especially when compared to Woodside's comparatively attractive 16.5x. Both sides seem to be quite hard pressed here, but it seems that Woodside's slow and steady pace is going to outrun Santos who might have sprinted a little too early in this race. Woodside takes the slow burn approach and scores in what is turning out to be a very close contest.

Woodside: 2

Santos: 2

In the last two minutes, it looks like Santos is completely exhausted, and despite its valiant efforts, Woodside pulls out its trump card – a dividend yield of 5.7% complemented by its recent buyback to bring its total implied shareholder yield to over 15%. Santos attempts to respond with its relatively small 2%, but does not have the firepower to defend against this onslaught, and Woodside puts it straight past the goalkeeper.

Woodside: 3

Santos: 2

As the match draws to a close, it is clear that, despite Woodside's close win, some questions remain around its higher gearing and future growth prospects. These issues aside, on the baseline metrics presented above, Woodside appears to be an attractive proposition given its shareholder yield, disciplined capital management and strong focus on shareholder value.

Although Santos has lost today's battle, it seems to have a lot of potential with its large reserves position (compared to enterprise value) and near term plans for the future. However, it does seem that a boost in earnings is priced in, which could be seen as a potential risk in the event that this does not eventuate.

The post Kick Off: Woodside Petroleum Limited v Santos Ltd appeared first on The Motley Fool Australia.

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Facing off in the oil and gas pool, the incredibly fast growing oil and gas producer, Oil Search Limited (ASX: OSH) goes head to head with Santos Ltd (ASX: STO) in a highly anticipated pool stage round of the ASX world cup.

Pre-match commentary and stats

Whilst both companies are roughly around the same size, it does seem that the crowd pleaser (and market favourite) is Oil Search, with its highly anticipated jump in production expected to quadruple volumes. Although Santos is no slouch, its production growth is not expected to hit the double digits this year.

Kick Off

Santos quickly takes charge of the situation with an Enterprise Value to Proven and Probable Reserves (EV/2P) ratio completely blowing Oil Search out of the water (14.2 to 39.1). Despite the superb abilities of the Oil Search defenders, Santos scores at the very start of what looks to be a thrilling match up.

Oil Search: 0

Santos: 1

Oil Search now takes possession and launches a blistering offensive, based on its reserves life. At current levels of production this equates to 71.4 years compared to Santos' 27.7 years, however, on forecast production levels, Oil Search's reserves life drops to 26.5 years and Santos to 25.1 years. Although it looked like a goal was imminent, Santos manages to kick the ball out of its danger zone and back to the midfield where the sparring continues.

Oil Search: 0

Santos: 1

At half time Oil Search is looking a bit worse for wear, especially compared to its less favoured rival Santos. As the second half commences, it is clear that Santos is determined to push through.

Santos is looking for some weaknesses in Oil Search's admirable defence line, and starts to break it down gradually using its P/E ratio of 27.7x. Oil Search's P/E ratio of 64.8x does not stand a chance and it looks like it's all over, Santos scores again! Although a goal is a goal, one wonders whether this one was really deserved given its metrics are above what one would consider value (obviously there is a fair bit of growth built in here).

Oil Search: 0

Santos: 2

It seems that from a balance sheet perspective, Oil Search is stronger with a debt to capitalisation ratio of 23.2% against Santos at 28.8%. Although both are quite reasonable, Oil Search just comes through with the goods making it more of a competition.

Oil Search: 1

Santos: 2

As the final moments draw nearer, Santos launches one final attack based on its dividend yield of 2%. Oil Search cannot compete with its yield of 0.4% and thus does not have the strength to defend against this war of attrition – Santos scores again!

Oil Search: 1

Santos: 3

As the final whistle blows, there is no doubt that it has been a well fought match, with Santos coming out the victor despite the crowd pleasing efforts of Oil Search. Although it does seem that the metrics for Santos look better, Oil Search has grown extremely quickly over the past few years and should not be underestimated.

The post Kick Off: Oil Search Limited v Santos Ltd appeared first on The Motley Fool Australia.

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Facing off in the oil and gas pool, the iconic Australian oil and gas producer, Woodside Petroleum Limited (ASX: WPL) goes head to head with Origin Energy Limited (ASX: ORG) in a highly anticipated pool stage round of the ASX world cup.

Pre-match commentary and stats

Woodside has raised a few eyebrows with its recent withdrawal from the Leviathan field raising questions around where its near term growth will come from. Matching up against the Australian goliath is Origin Energy, making ripples of its own with its recent entry into the Western Australian Browse Basin, acquired for the princely sum of US$800 million from Karoon Gas Australia Limited (ASX: KAR).

GAME ON

At the outset, it looks like a strong play from Origin with its Enterprise Value to Proven and Probable Reserves (EV/2P) ratio showing slightly better value for money. Origin moves quickly to strike at the goal posts with an almighty push but at the last minute its shot is deflected much to the dismay of its vocal fans.

It seems that Origin's rising debt levels have inhibited its ability to put one past its rival. Woodside seems to be quite comfortably placed with its debt to capitalisation ratio at just over 10% – quite a strong statement being made here by the Woodside team that it will not be goaded into making investment decisions that fall outside its capital management criteria. In this regard, Origin has been unable to penetrate the strong defensive line put up by Woodside and is forced to beat a hasty retreat.

It's full steam ahead with Woodside now leading the charge through conventional means, and it has put up a strong case with a trailing P/E Ratio of 18x. Origin doesn't stand a chance with its weak earnings leading to a poor defence of the P/E ratio.

An unfortunate combination of high gearing and poor earnings have allowed Woodside to steal a goal from its rivals, causing its supporters to chant its motto: capital management and making disciplined investment decisions.

Woodside: 1

Origin: 0

Origin is finding itself reeling after the exhausting battle, but seems to draw strength from the very earth it stands on, as it quickly capitalises on Woodside's low reserves life, which also seems to be related to the initial problem of a lack of growth opportunities for the oil and gas darling. Origin on the other hand, does not seem to have a shortage of prospects and is looking to play the long game. Origin puts through the equaliser with ease, and the crowd goes wild: the long game, they cry!

Woodside: 1

Origin: 1

It seems that the final minutes are dragging on with both teams ferociously competing, shoulder to shoulder and neither getting the advantage. But slowly it is becoming apparent that Woodside's heavy focus on capital management is paying off, quite literally, with an abundance of cash allowing its dividend yield of 5.5% to outpace, outstrip, and outplay the slightly less attractive 3.5% put up by Origin.

Woodside: 2

Origin: 1

At the close, it has been a well fought match, with Woodside's superior capital management and strong balance sheet focus winning the day. However, Origin's long-term strategy may just be kicking off, so this is definitely a team to watch. Time will tell.

The post Kick Off: Woodside Petroleum Limited v Origin Energy Limited appeared first on The Motley Fool Australia.

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The most recent Berkshire Hathaway Inc (NYSE: BRK-A, BRK-B) letter to shareholders contained a number of pearls of wisdom, including one surprising admission: Mr Buffett's will contains instructions that 90% of the remaining cash bequeathed to his wife is to be put into a low-cost, U.S.-based S&P 500 index tracking fund.

The legendary investor stated that, "long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."

Although this is a rather startling admission from an investor many regard as being one of the best of our times, this is not a new strategy. In fact, this is part of an old debate, one that has attracted quite a lot of commentary and research, on whether passively managed index tracking funds perform better than actively managed funds.

According to a recent S&P Indices Versus Active (SPIVA) report, the S&P 500 Index outperformed 72.7% of all large-cap U.S. equity funds over a five-year period. Its Australian equivalent, the S&P/ASX 200 (ASX: XJO), outperformed 60.4% of Australian equity funds over the same timeframe (on a total return basis, which includes dividend reinvestments).

Exposure to the S&P 500 index can be accessed via the ASX-listed iShares Core S&P 500 Exchange Traded Fund (ASX: IVV), costing a paltry 0.07% per annum management fee (plus brokerage costs). On a total return basis, the iShares Core S&P 500 ETF has returned 14.9% per annum over the past five years.

Readers may also wish to consider investing in the Australian S&P/ASX 200 Index through the SPDR S&P/ASX 200 Fund (ASX: STW), which has moved in a similar fashion to the S&P 500. On a total return basis, the SPDR S&P/ASX 200 Fund has returned 14.6% per annum over the past five years, and has a management fee of 0.29% per annum.

The two broad-based ETFs mentioned above represent broad diversification tools and provide for an easy way to access the wide gamut of businesses across the spectrum of each respective benchmark index. In addition to these broader index trackers, there are also a multitude of ETFs that investors can consider to gain exposure to specific sectors such as global healthcare stocks through the iShares Global Healthcare ETF (ASX: IXJ) or commodities through the BetaShares Commodities Basket ETF – Currency Hedged (Synthetic) (ASX: QCB).

Risks

Investors should note that there are some risks to be aware of. The ETF could suffer from tracking error, a situation where the ETF does not exactly follow its benchmark index, or it could have a price mismatch, a situation in which its Net Asset Value (NAV) deviates from its market price.

There is also the risk that exchange rate fluctuations may affect the value of the portfolio if it is not currency-hedged. Market risk such as liquidity issues may make buying or selling ETFs difficult. Additionally, some ETFs may be "synthetic" and use derivatives/swaps to increase its index tracking accuracy which may lead to significant counterparty risk (the risk that the ETF will lose money if a third party to the swap or derivative does not honour their commitment).

Foolish takeaway

Although past performance is not an indicator of future results, in the long run, the statistics seem to indicate that a large percentage of managed funds have failed to beat their benchmark index.

For the many investors who are not interested in spending an inordinate amount of time scrutinising, analysing and researching companies or managed funds, an index tracking fund may prove to be a good, low-cost alternative. Given the multitude of ETFs available to investors, it would be prudent to do some further research into each type and understand the specific risks involved.

Recent ruminations by the "Oracle of Omaha" in Berkshire's latest shareholder letter and the longer term results above demonstrate that investors may do well to consider index tracking funds as alternatives to investing in individual stocks or in actively managed funds, or as additions to round out a stock portfolio.

The post The Warren Buffett-approved alternative to stock-picking appeared first on The Motley Fool Australia.

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Investors often watch the market with great trepidation, experiencing feelings of exuberance on the slightest whiff of upside and allowing the panic to take over on days where the market is nobody's friend.

Indeed playing the markets on a day to day basis can be a tough game, so much so that iconic investor Warren Buffett felt compelled to tell investors to focus less on daily fluctuations and instead look to the underlying value.

Of course, if a company makes a price sensitive announcement, or if you discern potentially severe headwinds brewing, it is always wise to evaluate the new information carefully. This assessment may lead you to cut your exposure, sell out completely, do nothing, or view the resultant movement in price as an opportunity.

For investors looking to play the long game, such periods of volatility can offer up some potential profitable opportunities, if your assessment of the company in question results in the continued strength of its value proposition.

If you're thinking about a long-term buy and hold strategy, here are three stocks to consider for your portfolio.

Telstra Corporation (ASX: TLS)

Given the rise of the internet savvy device (included in this category are watches, phones, tablets, laptops, glasses and all the in-betweens) and a growing trend towards working in "the cloud", there seems to be a strong pipeline of demand for Telstra's not inconsiderable services.

Australia's largest telco is currently trading at a touch over $5, giving it a market capitalisation of $62.34 billion and a price to earnings ratio of 15.9 times. Although this doesn't strike me as a bargain, its current dividend yield of 5.7% is looking not too shabby against today's current bank deposit rates and given Telstra's potential for growth ahead, this could be a great play in a market that is sometimes overly focused on the short-term sprint.

BHP Billiton (ASX: BHP)

BHP's share price currently sits at just over $35 and is down 6% since the start of 2014, giving it a price to earnings ratio of 14.3 times and a dividend yield of 3.3%. The "world's leading diversified resources company" recently took a beating on the back of a significant drop in iron ore prices. Although the company has been penalised heavily, along with other iron ore miners, its saving grace is a strategy that aims to diversify, with recent announcements indicating a stronger focus on investment in potash (a primary ingredient in fertiliser), even contemplating that this might be a fifth pillar to add to its "four pillars policy".

In addition to metallurgical coal and iron ore, BHP now counts petroleum, copper and potash as other important areas of its business. Despite this positive aspect, BHP's share price of $35.50 seems to be a risky proposition, especially in light of the recently bearish view being put forward on iron ore prices.

Setting aside the short term fluctuation in iron ore prices, I view BHP's business to be a positive one given its focus on efficiencies and productivity (the company is targeting internal rates of return of above 20% for its major projects), diversification strategy, dominant industry position and one of the lowest iron ore break even prices, second only to Rio Tinto (ASX: RIO) at around US$45 per tonne.

BHP may also benefit from a falling Australian dollar should the iron ore price fall out of bed. Although it is difficult to estimate fair value, other Fools would consider buying BHP at $25 per share. In short, I believe that BHP has a strong value proposition in the long term, although the current risk inherent in a reduced iron ore price deserves some serious consideration.

Australian Agricultural Company (ASX: AAC)
A fast-growing and increasingly wealthy emerging markets population is increasing the demand for food products. One company to benefit from this future trend is AACo, Australia's largest beef cattle producer.

Despite recent issues around live cattle export bans, management changes and adverse weather conditions leading to net losses, AACo has regrouped and focused its attention on the burgeoning Asian markets, and is currently in the process of completing its beef processing facility in Darwin (expected to be completed by end of 2014).

Interestingly, the company has attracted some high profile investors amongst its substantial shareholder ranks such as billionaire investor/trader Joe Lewis, who holds 19.99% (plus a further 1.8% in equity derivatives and a convertible bond that would equate to around 8% of the company's total issued equity), and an IFFCO/FELDA joint venture that owns just under 10%.

The company's recent $1.25 share price (equating to a market capitalisation of $676 million) compares favourably to a net tangible asset valuation of $1.44 per share, indicating that AACo could be undervalued, at least on one metric.

Foolish takeaway

Playing the long game can offer many benefits for investors who are cognisant of a company's underlying value. As Buffett says, "the best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they're on the operating table."

BHP and Telstra offer a number of redeeming qualities, including their dominant market positions and alignment to growth industries, which lead me to conclude that a long-term value proposition exists (with a few cautionary caveats in BHP's case). Although AACo is a much smaller company, it could have a bright future ahead with strong demand for beef products coming from emerging market economies developing in line with their growing income levels. As they say, slow and steady wins the race.

The post Play the long game with these 3 future-focused companies appeared first on The Motley Fool Australia.

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The company's share price has increased 25% over the past six months, helped along by its most recent half yearly result, which seemed to surprise brokers and investors alike. Revenue was up 62% on the prior corresponding period, whilst underlying net profit after tax (excluding mark to market derivative movements, asset sales and tax adjustments) increased by a chest-beating 160% (or 267% on a non-adjusted basis).

The increased revenues also translated through to its operating cash flows, leading to a $57 million increase in Beach's cash position (currently a sizeable $404 million). The company also has an undrawn $300 million debt facility and a fairly conservative ~6% debt-to-capitalisation ratio, indicating that there is potential for some corporate action. Indeed, other writers here have noted Beach Energy's increased equity interest in Cooper Energy (ASX: COE), taking its total ownership to 18.4%.

However, Beach has stated that "there is no current intention" to make a takeover bid for Cooper Energy and that the equity position is to assist with joint ventures moving forward, although it will "continue to evaluate opportunities that would add value to shareholders".

Another positive for the company is its positioning as a gas supplier to the Eastern Australian market which may prove to be a lucrative opportunity especially in light of potentially higher gas prices from anticipated supply shortages. A recent Australian Government Bureau of Resources and Energy Economics Report puts historical Australian East Coast gas prices at $3 to $4 a gigajoule, a far cry from the current levels reportedly being hit, at $6 to $9 a gigajoule.

The looming shortage has been characterised by a number of factors, including the expiry of long term wholesale gas contracts and an increase in demand competition from LNG exports. Although an equilibrium price has not been established, it is seems unlikely that the historically low pricing evident in the East Coast market will prevail. In anticipation of this, a number of parties such as Origin (ASX: ORG), Santos (ASX: STO) and  Chevron (NYSE: CVX) have signed gas supply agreements or are working with Beach to explore and appraise its tenements.

From a pricing perspective, Beach's price to earnings ratio of just under 9x makes it look (suspiciously) cheap, especially when compared to Woodside Petroleum (ASX: WPL) at 16x and Santos at 26x. As Warren Buffet says, "price is what you pay, value is what you get". So is this value? In addition to its potential share price growth, Beach's 4 cents in dividends per share this year equates to a dividend yield of just under 2.5%, roughly the same as Santos but well under Woodside's 5.64%, although one could argue that any dividend from an oil and gas company is a bonus.

On an enterprise value to proven and probable reserves (EV/2P) ratio, Beach Energy at 20 times is in between Woodside at 23 times and Santos at 13 times. Whilst Santos appears cheap, recent concerns around cost blowouts at its Gladstone LNG operations and reserves quality seem to have negatively affected its share price.

Beach is forecasting a production range of 9.2 to 9.6 million barrels of oil equivalent (mmboe) for the full 2014 financial year, with the 5.0mmboe half year result a good sign that this result is on track. The company's proven and probable reserves (2P) currently stand at 93mmboe, with contingent (2C) resources at 449mmboe indicating that its production growth profile could have some way to go. In particular, the Bauer oilfield in the Cooper Basin's Western Flank has shown great potential, with recently drilled Bauer 12 and 13 wells both yielding positive results (adding 2.5mmboe to Beach's 2P reserves).

In terms of production mix, I like that Beach has a 53/47 split between oil and gas, whilst Santos and Woodside both derive the majority of their production from gas and gas liquids. Beach's percentage of production from oil has increased from 31% in 2011 to the current 53%, although this may not be sustainable in the long run given its reserves split (24/76 oil/gas at 2P level).

Foolish takeaway

Beach Energy has shot the lights out in the first half of 2014 with both revenues and earnings increasing significantly, and production levels on track to hit a record high of (at least) 9.2mmboe. It has a dominant position in the Cooper Basin and strong partnerships with companies such as Chevron. It also has a strong balance sheet (significant cash and minimal debt) and ready access to capital, in addition to a fully funded capital expenditure program for the 2014-15 financial year, which indicates a certain level of flexibility in terms of "adding value" for shareholders.

Given these positive aspects and what seems to be a reasonable price, one could put forward the notion that this rocket has quite a bit of fuel left in it. Ignition sequence initiated.

The post Fuel your portfolio with this potentially undervalued oil and gas player appeared first on The Motley Fool Australia.

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Xero provides online accounting software, or Software as a Service (SaaS) software, to small businesses via the internet. Often people will describe this as being part of the "cloud computing" phenomenon – where a given service is accessible directly from the "internet cloud" through a standard browser. The company's meteoric rise has been associated with a growing trend for businesses to move from traditional accounting software based on desktops or PCs, to the cloud.

The company has grown exponentially over the past six years with the most recent half yearly result of NZD$30.3 million in revenues representing an increase of 84%. This has translated to a net loss after tax for the half year of NZD$17.1 million, with the main reasons cited by the company being continued investment in product development, recruitment of senior leadership and accelerated expansion in the United Kingdom and United States. The market seems to have taken its losses in stride, with the share price rising 493% to AUD$36.90 in the last year, equating to a market capitalisation of AUD$4.7 billion.

Xero's price to sales ratio stands at 88 times on a trailing 12-month basis, which seems to indicate a significantly more expensive proposition in comparison to its competitors such as Intuit (NASDAQ: INTU) at 5.3 times and Reckon (ASX: RKN) at 2.7 times.

Based on Xero's current market capitalisation and an estimated 80% increase to revenues in 2014, this roughly equates to a forward price to sales ratio of 68 times, a number that still seems to be quite expensive, although it becomes more reasonable in the context of Xero's customer acquisition and revenue numbers, with both increasing over 80%. In terms of market share, Xero estimates that it currently has 19% of the New Zealand small business market, 4% of the Australian market and less than 1% of the U.K. and U.S. markets respectively, indicating that there is room to grow their customer base further.

The company currently has just over 250,000 clients and aspires to take this to over 1 million in the next five years, no small feat given the stiff competition. In contrast, MYOB claims to have 1.2 million customers and Reckon states it has 600,000 registered businesses on its platform. Xero's current focus is to use its NZD$230 million cash position to bolster its activity in the United States, a market that the company estimates has 29 million potential customers.

There are several risks here that I am wary of. There is a question mark over Xero's current market capitalisation of nearly $5 billion, given it has not turned a profit and does not anticipate one in the near future due to the reasons mentioned above. Additionally, recent media articles indicate that competition in this space is heating up, with MYOB, Intuit and others ramping up staff numbers and marketing spend in addition to investing in the quality of their products.

Xero has responded with an aggressive tilt at client acquisitions planned for the US, and is currently in the midst of a roadshow across Australia to win over more accounting firms to its partnership channel, an important aspect of their growth strategy. The company is also investing heavily in its product which has won over some unlikely supporters.

Another positive for Xero is the incredible amount of experience in its management team and board, which has been originated from its competitors Intuit and MYOB, as well as large IT behemoths such as Google, Microsoft, IBM, Apple and HP.

Foolish takeaway

If Xero is able to continue to build its market share and revenues whilst managing its costs and product quality, it could be a juggernaut in the making. However, investors should exercise caution, given the company is not profitable and in fact, its losses have increased, with the company choosing investment in its product and staff over profit in the short term. This implies that the company is taking a long-term view towards profitability and has prioritised its growth agenda over hard returns, a risky strategy that is not for the faint-hearted.

Investors should consider the risk and return trade off inherent in a company like Xero (fast growth, heavy investment, year on year losses and huge potential). Although the accounting software landscape is shaping up for a competitive battle, Xero's combination of innovative product, experienced management and capacity for expansion makes it the main contender from the land of the long white cloud.

The post Xero is up 493% over the last year, is there more to come? appeared first on The Motley Fool Australia.

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Primary Health Care (ASX: PRY) released its 2014 first-half results last Wednesday, and whilst the headline figures were all up (including earnings per share and its interim dividend), the share price has fallen 5.6% to $4.65 per share.

Primary Health Care's overall half-yearly earnings numbers were up on the prior corresponding period with net profit after tax and earnings per share both up by more than 8%, and its interim dividend up a hefty 38%.

The seemingly positive result was overshadowed by concerns surrounding its Medical Centres segment, the performance of which was impacted by lower dental revenues from the abolition of the Federal government's chronic dental disease scheme funding. This fed through to the bottom line with earnings numbers coming in at the lower end of the company's forecast for 2014 (7% to 13% growth in earnings per share).

Although dental comprised 9% of the Medical Centre segment's revenue, it amounts to less than 3% of the company's total revenue. On the upside, the new Child Dental Benefits Schedule could provide a slight increase to dental revenues, although it won't make up for the amount lost due to the chronic dental disease scheme closure. There is also the possibility that this area will be scrutinised in the near future by the current government, given its criticism of the chronic dental scheme's closure and its election commitment to "improve and restore dental services through Medicare".

Are Primary Health Care shares cheap?

Primary Health Care is currently trading on a price-to-earnings ratio (PE ratio) of 14.73 times, with its share price having come down 9.5% in the last six months. The question here is whether this represents good value or could be a dreaded falling knife scenario. The company recently reconfirmed its forecasted earnings per share growth in 2014 of between 7% and 13%, which would give it a mid-point forward PE ratio of 14.14 times and a forward dividend yield of over 4.0%, assuming that the company hits its forecasted numbers and retains the current dividend pay-out ratio of 58.5% (the interim dividend of 9 cents per share represents a 60% dividend pay-out ratio).

At first glance, Primary Health Care's PE ratio compares favourably to its competitors Ramsay Health Care (ASX: RHC) at 28.64 times, and Sonic Health Care (ASX: SHL) at 18.15 times. However, this is not necessarily reflective of good value, with some commentary indicating that all three are expensive at their current prices (see here and here). On a dividend yield basis, both Primary Health Care and Sonic look good at 3.7% whilst Ramsay is well under at 1.7%.

I prefer Primary Health Care given its domestic focus, organic growth agenda (complemented by small bolt on acquisitions) and upside potential in its Health Technology division (although this currently only makes up 5% of its earnings). Additionally despite concerns around its revenues and earnings slowing down, Primary Health Care has reconfirmed its outlook for the 2014 financial year, backed by a solid first-half result.

In contrast to Primary Health Care, Sonic and Ramsay both benefit from having international operations that geographically diversify their respective business models whilst also providing a natural hedge to a potential depreciation in the Australian dollar.

Whilst this may seem to be a positive risk mitigating strategy at first blush, it can also present other risks. Having international operations exposes these companies to other potential issues such as those currently being experienced in the United States (where some of Sonic's competitors have flagged a negative outlook in the U.S. lab services market), or continued weakness in the UK and French economies (which could affect Ramsay).

Foolish takeaway

Although there have been some recent rumblings around Australia's unemployment rate and an increasingly shaky economy, people will continue to get sick and old, see doctors, get blood tests and have scans performed. The health care sector may not be immune to a cyclical downturn, but at the very least, there will remain a core demand for their services.

Readers may wish to consider Primary Health Care over the long term, given its current dividend yield of just under 4%, forecast earnings per share growth of at least 7%, comparatively low PE ratio, a positive first-half result for the 2014 financial year, its diversified business model and long-term growth potential for the Australian health care sector. Live long and prosper indeed.

The post Is it time to buy Primary Health Care Limited? appeared first on The Motley Fool Australia.

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The proposal is via a Scheme of Arrangement, which the Directors have supported in the absence of a better (competing) offer, whilst noting that this support is also subject to an Independent Expert's report. The proposed Scheme still needs to jump through several hoops before being implemented, including shareholder, court and Foreign Investment Review Board approval, with shareholders due to vote on the proposed Scheme of Arrangement at the end of April or early May 2014.

Aurora's share price is currently sitting at $4.12, which is 57% above the $2.62 pre-offer price and 0.5% above Baytex's current offer. The market seems to be pricing in some possibility that greater value can be obtained.

A few points regarding this deal strike me as particularly pertinent for investors.

Baytex's offer is not subject to due diligence: Baytex has already had a good look at Aurora's "books" and determined this offer price. Given that due diligence proceedings sometimes result in potential acquirers walking away (such as in the case of Billabong International (ASX: BBG)), this is a good sign that the "deal has legs".

Baytex's offer is fully funded: Baytex's offer is underpinned by a fully underwritten capital raising (for $1.3 billion in Canadian dollars) with bridge financing in place should a contingency funding model be required. This basically means that Baytex has the necessary means to make good on its offer.

Independent expert's report due: Investors will note that final approval for the scheme is subject to an independent expert's report, which will give investors more information on whether the bid represents fair value for shareholders.

Potential for a competing bid: Although the Baytex offer was a significant premium to Aurora's current share price, there is every chance that a competing offer could emerge, with speculation that Marathon Oil (NYSE: MRO) is considering taking action. Marathon is the joint venture operator of Aurora's shale assets. Aurora's share price is currently sitting at $4.12, or 0.5% above the Baytex offer of $4.10, indicating that the market also believes that further activity to the upside could eventuate. However, readers will note that the Australian Financial Review reports that UBS has cut its rating of Aurora to a "sell".

Foolish takeaway

So what should investors do? Aurora's share price is looking quite expensive to me, and to buy in now would be risky given the current offer was a significant uplift to its pre-takeover offer share price. The upside potential could come from two avenues: the first being the independent expert's report, which could value Aurora's share price at a higher range, and the second being that a competing offer could emerge.

Although there is every chance that the report could justify a higher share price or Marathon Oil (or another party) could weigh in with a competing offer, investors should consider the potential risks to buying now. If the Baytex offer falls through, the share price could potentially drop back to its previous share price of $2.62. Given the risks and potential upside, Aurora's share price is looking quite expensive to me, especially given it is above Baytex's current "bird in the hand" offer.

Having said this, the Baytex offer came off the back of Aurora's significant upgrade to production and reserves in January 2014. Clearly Baytex is acknowledging the potential that is held within Aurora Oil and Gas. Readers can find out more about Aurora's positive qualities here and here.

The post Baytex wants to buy Aurora Oil & Gas Limited — here's what you need to know appeared first on The Motley Fool Australia.

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The Canning basin in Western Australia has been identified by the US Energy Information Administration (US EIA) as holding prospective resources of 235 trillion cubic feet (TCF) of gas and 9.8 billion barrels of oil (Bbbl). One oil and gas company that has a significant stake in this area is Buru Energy (ASX: BRU).

Buru may potentially see a revaluation of its worth via an increased share price in the coming year through the proving up of its reserves and increased production.

Here are five things I like about Buru Energy.

1. Alliances with experienced partners and operators: Buru has aligned itself with a number of experienced industry players such as Mitsubishi Corporation, Apache Energy (NYSE: APA), and Alcoa Inc. (NYSE: AA), all of which have vested interests in Buru's success in its exploration, development and production efforts. It is their involvement, along with the depth of Buru's management experience, that gives me greater comfort around mitigating the operational and execution risks of their forward exploration and development plans.

2. 2014 program is fully funded: Buru has a fully funded program in 2014 with over $188 million allocated to the development of its Ungani Oilfield, the appraisal of its Laurel Wet Gas formation, the exploration of the Ungani Oil trend, and the recently announced exploration program targeting permits in the Goldwyer Shale.

3. Strong investor interest and support: Recent capital raising programs have been oversubscribed in multiples, indicating that there is strong support from both institutional and retail shareholders. Despite this seemingly strong support, it is important to note that Buru's share price has been extremely volatile, with a 52-week low of $1.18 and high of $2.73. This is illustrative of a higher level of risk inherent in the company and readers will note that despite its significant market capitalisation (current $1.95 share price equates to a market capitalisation of $582 million), this is not a stable performer (yet) and does not seem to factor in a great deal of Buru's enormous potential reserves or expected production in 2014.

4. Buru acreage has been secured and has huge potential: Buru and Mitsubishi have entered into an agreement with the Western Australian government governing the exploration and development of its main permits for 25 years and also exempts Buru from relinquishing any of its exploration permits until 31 January 2024. Buru's permits cover over 64,000 square kilometres (or roughly 15 million acres) which represents around 0.83% of Australia's landmass. Given Buru's significant acreage and aggressive exploration program in 2014, there is every possibility that their reserves will be proven up and their production targets in the Ungani Oilfield hit, which could potentially give its share price a significant lift.

5. Shift from exploration to production: Buru aims to kick-start its production phase with an initial production rate of 3,000 barrels of oil per day (bopd), increasing to 5,000 bopd. Buru recently completed its first shipment of crude oil from the Ungani Oilfield to a South-East Asian oil refinery, under the marketing agreement with Mitsubishi Corporation. The bottom line here is that Buru is now entering a new phase of its life, and is now launching into production, which could bode very well for this comparatively large exploration company.

Foolish takeaway

Buru represents a higher level of risk compared to other more established oil and gas companies such as Oil Search (ASX: OSH), given it is only in its infantile stages of production. Nevertheless, Buru Energy represents the future of oil and gas production in Australia given its huge resource potential and strong partnerships with key stakeholders such as the Western Australian government and large international oil and gas companies.

Although readers should be mindful that Buru represents a higher level of risk, there is also the potential for huge return — 2014 should be renamed the Year of the Buru, in my humble opinion.

The post 5 reasons to like Buru Energy Limited appeared first on The Motley Fool Australia.

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Oil and gas exploration and production company, Aurora Oil and Gas Limited (ASX: AUT), has released a summary of an independent reserves estimate evaluation of its Sugarkane field reserves, showing a 54% increase on its mid-year 2013 update to 164.9 million barrels of oil equivalent (mmboe) on a gross reserves basis (121.5mmboe net).

Despite the announcement of a significant uplift in reserves, Aurora's share price remains in the doldrums, dropping 1.5% to $2.69 a day after the announcement, indicating that the reserves upgrade was not enough to sway short term sentiment. This could have been due to the larger fall out experienced by Australian equities, with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) dropping 1.75% on the back of larges losses on Wall Street.

Although readers must be mindful of the broader implications from poorer than anticipated economic data, this could represent a good buying opportunity. The pertinent question to ask is what caused Aurora's share price decline? Was it the broader economic environment, or was it some issue picked up in Aurora's most recent announcement?

Reserves upgrade

The 54% upgrade in Total Proved (1P) reserves is attributed primarily to Aurora's 40 acre spacing development (downspacing program).

A question that comes to mind is whether this program will be able to contribute positively to Aurora's bottom line. In other words, is it worth the effort to drill more wells in a smaller area for the additional production, and is the upgrade to reserves a credible one, given there is a potential risk that increased well densities may reduce production rates beyond the levels assumed in the methodology?

Although Aurora ranks first amongst the believers, investors should pause and reflect on the potential downsides and risks inherent in this strategy, especially in the context of tight oil or unconventional type resources that have comparatively higher decline rates when compared to conventional wells.

Despite questions around production rates and expected ultimate recovery of reserves, oil and gas production in the Eagle Ford Shale and the United States continues to grow, with the US Energy Information Administration (US EIA) forecasting that crude oil production in the United States will peak in 2019 at around 9.61mmbbl/d.

Eaglebine Play has potential

Although there is no evidence to suggest this will occur in the near future, Aurora has yet to assign any reserves to its recently acquired 14,000 net acreage in the Eaglebine play of East Texas, indicating that there may be further uplift to its overall reserves position in future.

Foolish takeaway

Although readers should take note of potential headwinds from the US economy and scrutinize the high decline rates associated with shale assets, Aurora's future appears to be bright given its significant upgrade to its Eagle Ford reserves, and potential for further upside through its Eaglebine acreage. In addition to the increased reserves level and potential, Aurora Oil and Gas has flagged a positive outlook for 2014 with production anticipated to increase ~47%, on the back of a solid 2013 which saw a 100% increase in gross production to 7.78mmboe (net 5.74mmboe).

With a significant increase to both reserves and its production outlook, Aurora appears to be well placed for a gallop (or at least a canter) in the Year of the Horse. Giddy up!

The post What investors need to know about Aurora Oil & Gas Limited's latest announcement appeared first on The Motley Fool Australia.

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Here are five reasons to give Aurora Oil and Gas a closer look.

Reason 1: Downspacing and improved stimulation design could lead to better well performance

Marathon's Eagle Ford operations have been driven, in part, by its focus on increasing the spacing density of its wells, a process known as "downspacing", with over 90% of wells drilled in 2013 at 60-acre spacing or less. In its most recent quarterly update, Aurora reconfirmed the positive results from the downspacing of its Sugarkane Field acreage operated by Marathon.

Aurora now anticipates that the majority of its non-operated Sugarkane field's acreage will be developed on 40-acre spacing based on the positive results yielded by Marathon's operations, with a 30-acre spacing pilot potentially adding further value to the field's development and increasing its well inventory.

Reason 2: Production forecasted to increase by 47% in 2014

Aurora anticipates that in 2014 production will increase 47% to 8.2 million barrels of oil equivalent (net), or 22,500 barrels of oil equivalent per day in net production. Despite this significant announcement, it seems that Aurora's share price has not improved and in fact has fallen 9% from its recent one month high of $3.02 to $2.74, which suggests that the market remains unconvinced of the company's potential to deliver a positive result.

Reason 3: Reduced capital expenditures and an increased focus on balance sheet management

Aurora's outlook is focused on its non-operated assets, with total capital expenditure in 2014 of US$415-495 million anticipated to be lower than 2013. Additionally the company anticipates that its gearing profile will be lower than 2.5x debt to earnings before interest, tax, depreciation, amortisation and exploration Costs (EBITDAX) in 2014. Lower anticipated capital expenditures and an increased focus on its gearing profile indicates that the company is taking a conservative approach to managing its costs.

Reason 4: Acquisition of Eaglebind position

Aurora has secured 14,000 net acres  in the Eaglebind prospect, a play that is regionally on trend to the Eagle Ford shale. Although this has not been assessed in any great detail, this prospect represents great potential. Aurora is still in the tentative stages of development, and is considering "acquiring partners to participate in the next stages of project evaluation."

Reason 5: West Texas Intermediate crude oil price expected to average $93 per barrel in 2014

The U.S. Energy Information Administration is forecasting that WTI crude oil prices will average $93/bbl in 2014 and $90/bbl during 2015. This falls squarely within Aurora's scenario analysis, with a $90/bbl WTI price and 11.0 million barrels of oil equivalent gross production rate estimated to produce US$428 million in EBITDAX in 2014.

Foolish takeaway

Although readers should be mindful to consider macroeconomic factors at play, such as the price of crude oil (and supply/demand factors therein), Aurora Oil and Gas represents an avenue to explore when riding the potential upside in relation to the shale revolution and its related production technologies. The company's fourth quarter update is scheduled for Friday, 31 January 2014, which will give investors greater clarity with regards to this operator's performance and ability.

The post 5 reasons Aurora Oil & Gas Limited could soar appeared first on The Motley Fool Australia.

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