The outlook for American integrated oil and natural gas giants, namely Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP), has just brightened. In its latest 2012 World Energy Outlook, the International Energy Agency predicts that the U.S., which for the first time since 1949 has become a net exporter of petroleum products, will be the leading oil producer by 2020. This is made possible by new conventional discoveries and technological advances that are boosting production from shale formations. The nation's largest companies are taking advantage of this boom and elevated oil prices, which are likely to be supported in the future by growth in emerging markets, especially in China and India. The leading market positions of the American energy titans so far has enabled them to generate substantial earnings and cash windfalls, which, in turn, has supported their generous dividend policies. A cash-rich Chevron, traditionally a dividend-growth play, has been and will continue to be a particularly attractive income and growth stock.
In terms of total returns, over the past decade, Chevron has outperformed its main competitors, Exxon Mobil and ConocoPhillips. In the noted period, Chevron's stock produced a total return of 15.5% per year, while Exxon Mobile and ConocoPhillips generated total returns of 11.9% and 14.9% per year, respectively. For comparison, BP (NYSE:BP) produced a comparatively paltry total return of 4.4% per year. Total returns have been driven by both strong capital appreciation and dividend growth. In terms of return on equity, both Chevron and Exxon Mobil have achieved 5-year average return on equity in excess of 20%. For comparison, ConocoPhillips has a 5-year average return on equity of only 6.8%.
As regards the dividends specifically, Chevron, whose dividend currently yields 3.5%, grew its dividends at an average annual rate of 9.2% over the past five years. Over the same period, Exxon Mobil and ConocoPhillips expanded their dividends at higher average annual rates of 9.7% and 10.0%, respectively. Despite the marginally higher dividend growth rate than Chevron's, Exxon Mobil is yielding 90 basis points less, or 2.6%. On the other hand, ConocoPhillips has the highest dividend yield of the three, at 4.8%. However, ConocoPhillips' payout ratio as percentage of free cash flow is the highest among the three.
Chevron has an optimal cash flow position that assures future dividend increases, notwithstanding the expectation that the company will seek to expand its assets in the United States and globally. The company has very little long-term debt, about 9% of its equity, and plenty of cash at hand. Its cash stock totals $21.6 billion and its long-term debt totals $12.3 billion. On the other hand, Exxon Mobil, the world's biggest dividend payer, has almost as much long-term debt as Chevron but only half the competitor's amount of cash at hand. ConocoPhillips has about $3.7 billion in cash and $21 billion in long-term debt. Indeed, Exxon Mobil has depleted its cash reserves due to asset accumulations to expand production capacity. Chevron, whose annual oil production this year will be 3% off relative to the target, is likely to spend some of its cash on productive asset purchases. However, it also plans to retain high liquidity, so as to maintain a cushion against volatile crude prices and possible cost overruns on its major projects, particularly the natural-gas project in West Australia.
While Exxon Mobil produces two thirds more oil and natural gas than Chevron, the latter's profitability per barrel currently exceeds that of Exxon Mobil. Moreover, Chevron's total production is more leveraged than Exxon Mobil's to oil, which is currently more profitable than natural gas. This was particularly obvious in the last quarter, in which Chevron's revenues plunged 10% and EPS dived 46% from the year-earlier quarter due to lower oil prices. However, the oil supply has not expanded as dramatically as has the supply of natural gas, which adversely affected natural gas prices. A measured additional oil production and supportive demand from emerging markets bode well for elevated oil prices in the future, which should support Chevron's financial performance in the years ahead. Demand for natural gas and natural gas liquids, considered by some the fuel of the future, will also rise significantly, benefiting Chevron's natural gas plays in Australia and Indonesia.
Chevron is expanding its domestic and international output capacity. The company recently acquired Chesapeake Energy (NYSE:CHK) acreage in the lucrative Permian Basin. As already noted, the company is expanding its oil and natural gas assets in Australia and Indonesia, which will have a particularly favorable exposure to the growing emerging markets in Asia. In Europe, the company is increasing acreage in Lithuania, Poland and Bulgaria. Unfortunately, it should be noted, an Argentine court has just seized Chevron's assets in the nation in a push to collect $19 billion that Ecuadorean plaintiffs against the company, based on pollution charges, had won in a local court.
Despite the current adversity, it is relevant to note that the growing opportunities for Chevron and Exxon Mobil have been recognized by several reputed hedge fund managers. Stanley Druckenmiller, who used to run Duquesne Capital, one of the most successful hedge funds in the industry's history, returning more than 30% per year over its three decades of operations, and is currently running a family fund, initiated new positions in Chevron and Exxon Mobil in the third quarter. He invested as much as $210 million in the two stocks. Billionaire Ken Fisher also bolstered his stake in Chevron in the previous quarter, investing as much as $416 million in the stock. Jeremy Grantham, a famed value investor, is also an avid Chevron bull, holding a stake in the company valued at nearly $1.1 billion.
Chevron's share price, $102.40 per share, is 4.6% higher than a year ago. The company has a market capitalization of $200 billion. This compares to the price of Exxon Mobil stock of $86.45 per share, which is 11% higher than a year ago. Exxon Mobil's market capitalization is $394 billion, almost double that of Chevron. ConocoPhillips trades at $55.03 per share, with a market capitalization of $66.8 billion. The stock is down 21% over the past 12 months.