In this article, I take a look at the top five oil stocks based on their market capitalization. By the end of the analysis, I plan on providing a clearer picture of which stock has the most potential to be a profitable investment for your money. Based on market capitalization, the top ranked oil services stocks are Exxon Mobil (XOM), PetroChina (PTR), Royal Dutch Shell (RDS.A), Chevron (CVX) and Petrobras-Petroleo Brasil (PBR).
What Does 2013 Have in Store for These Oil Giants?
There are two macroeconomic events which will affect all of these oil producers to a greater or lesser degree. Firstly, the imposition of carbon tax, now that President Obama has been re-elected. Secondly, the United States' expected slide into recession due to the fiscal troubles which continue to plague it.
Royal Dutch Shell
Return on Equity
Estimated Fair Value Range
Upside Potential (Premium) to Reach a Fair Stock Value
55% Upside Potential
15% Upside Potential
12% premium over the fair value
Data from MorningStar on December 9, 2012
Exxon Mobil: Exxon Mobil recently announced a joint venture with Rosneft (RNFTF.PK) to explore and develop oil and gas in Russia. Furthermore, it has conducted successful exploration and discovery operations in Europe and Africa. Financially, the company continues to make solid progress. Over the year 2011-2012, its revenue increased by 26.9% to become $486 billion. Furthermore, positive new cash flow was recorded at the end of the year. The company pays an annualized dividend of $2.28 on a quarterly basis. After hitting its lowest trading price point in three months in November, the stock is considerably undervalued and has at least 55% upside potential to reach its fair value.
The company's stand-out feature from the metrics taken into account is its unparalleled low debt. Exxon Mobil can finance its growth inorganically even if their multitude of profitable ventures runs dry, which does not seem to be happening any time soon. While it may be not have the highest dividend yield compared to its peers, its ability to turn a profit from the resources employed far outperform all its rivals; Exxon Mobil is highly efficient in generating profit from its shareholder's equity.
PetroChina: PetroChina is the largest integrated oil company in China. It performed extremely disappointingly in Q3 2012, as it continued to struggle to operate its refineries profitably. A third of the company's current crude oil volume comes from the Daqing Oil region, the largest crude oil producing area in China, but which has now reached maturity. Associated costs in the Daqing region are only expected to grow exponentially over time, and it is essential for PTR to shift the focus of its production elsewhere.
The company has a highly rewarding 3.39% dividend yield at the moment, which makes the stock very attractive. A favorable debt/equity ratio of 0.4 also makes it a safe investment. What further underlines the security of PTR is that it is backed by the Chinese government. With a stock price of $138.26 at the time of writing, PTR is well undervalued and has at least 15% upside potential to reach its fair value. There are not many positive sentiments for the future, due to slippage in profits for Q3 2012.
Royal Dutch Shell: Shell has shown remarkable progress over the last year as its revenues increased by 21.9% to $484 billion, and profits also surged from $71 billion a year earlier, to $88 billion by the end of 2011. The company has raised its 2014 volume target to 3.7 million barrels per day, a 3.3% per year volume growth until 2014. Shell agreed to invest $1 billion annually in China in gas projects, due to exploding demand from local industry; a further $20 billion is to be invested globally in natural gas projects by 2015.
With a P/E ratio of 7.9 and a stock price of $67.04. This oil giant offers solid growth prospects, due to its geographically diversified production assets. Further incentive to prefer RDS over the others is provided by its higher dividend yield at the moment, along with a very low debt/equity ratio, which shows long-term sustainability and sound profitability. While the company's ROE is easily beaten by XOM, it is still a very respectable figure and provides reassurance regarding the company's ability to pay back on its promise to investors. RDS also has the highest EPS growth value amongst its peers.
Chevron: This energy giant has been caught in numerous courtroom sagas. Courts in Canada, Argentina, Brazil, Ecuador and even the United States have been at the center of decisions regarding oil spills in Ecuador and Brazil. Despite these troubles, the company has been paying consistent and increasing dividends for the past 25 years. For 2013, the company has announced a $36.7 billion capital and exploratory budget, out of which 90% will be allotted to upstream crude oil and natural gas businesses.
Chevron's current dividend yield is 3.36%, which is outpaced by its peers, and an EPS growth of 4.8. Due to the company's consistent ability to generate profits, it has virtually minimal debt and a very high ROE. Efficiency and profitability are highly prioritized for Chevron, and the results underline the company's philosophy. Priced at $106.99, the stock is considered to be overvalued, with 12% premium over its fair value. The stock price is expected to rise in 2013 as soon as impending lawsuits are settled and production can be restarted in certain countries, just as it has been in Brazil.
Petrobras-Petroleo Brasil: Brazil's state-controlled oil company produced 71,000 barrels per day over the last year, yet it still failed to achieve the returns it had been aiming for. Much of this is down to political interference, poor management and incremental costs. The company also handed back its deep-sea prospecting license and pulled out of New Zealand after facing difficulties at home. Concerns regarding funds for offshore drilling in Brazil are of such gravity that the oil giant is continuing to off-load assets, as it is willing to face a production cut by selling off Houston Area Refinery as well.
Due to its operational troubles, PBR has the least impressive dividend yield out of all five companies, and has an extremely negative 16.4% EPS growth. Furthermore, while its stock price may be one-fifth of its competitors, its potential for future growth is not the same as its opponents; the company's 7.9 ROE value does not indicate that the management is proficient enough to turn around its fortunes in the short run, and pessimistic sentiments surround this stock for investors.
Of the five above noted stocks, I suggest that RDS.A and CVX are best positioned to take advantage of 2013. While CVX can greatly benefit from its court issues being resolved, its habit of producing consistent profits is an extremely attractive characteristic for investors. RDS.A, on the other hand, is presently offering an unmatched dividend yield, a healthy EPS and a very affordable stock price. Both of these stocks are expected to claw their way up on the price chart next year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.