By Matt Doiron
Oil majors in general are trading at low multiples in the market, and one of the cheapest stocks in the industry from a P/E perspective is BP plc (BP). The value case for BP is that it currently trades at 9 times consensus earnings for 2013; at that multiple, even no growth at all would make the stock a decent buy (the trailing earnings multiple is even lower than that figure, but BP has been selling off some of its assets and so the financials are likely to come in lower this year). In the third quarter of 2012, revenue was down 5% but the company improved its margins compared to the third quarter of 2011 with the result being an actual increase in net income. We certainly wouldn't use past performance as a strong indicator of future results but we do think that BP looks attractive from a value perspective at the current price.
Investors may also want to start giving BP plc some credit as a potential income investment. Of course, it's always advisable to think twice before depending on dividends from a company so dependent on commodity prices, and BP did actually suspend its dividend payments for some time in the wake of Deepwater Horizon. Still, at 54 cents per share per quarter we get an annual yield of 4.9%, which is at least something of a plus for the stock.
BP plc at one point had been one of the very top energy stock picks among hedge funds, but by the third quarter of 2012 it barely managed to make our top ten list (find more energy stocks hedge funds loved). Seth Klarman's Baupost Group was the largest holder of the stock in our database of 13F filings from hedge funds and other notable investors, reporting a position of over 11 million shares (see more stock picks from Seth Klarman). The Bill and Melinda Gates Foundation's trust owned 7.1 million shares of BP at the end of September (check out more stocks the trust is invested in).
Other large oil companies include Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), ConocoPhillips (COP), and TOTAL S.A. (TOT). Of these companies, the two that match BP's earnings multiple for 2013 or come in lower are Chevron (at a P/E of 9) and Total (at a P/E of 7, with Wall Street analysts expecting the company to improve considerably from 2012). We'd note that Chevron's business has been doing poorly recently: in the third quarter of 2012, revenue was down 10% versus a year earlier and this in turn carried net income down by about a third. As a result we'd call BP a better investment there. Total's results have been more mixed, and the dividend yield is in the 5% range there as well; it may be worth considering.
ConocoPhillips is another high yielding oil major, but that company combines a slight price premium to BP with double-digit declines in sales and net income over the last year and so we would lump it in with Chevron as a stock to avoid. Exxon Mobil, arguably the market leader of the industry, has the highest P/E for 2013 at 11; that is still well within value territory, particularly if it gets credit for its market position. The company's revenue and earnings were down in its most recent quarterly report compared to the same period in 2011 but the decline was more moderate than at some of its peers. While BP is cheaper, and is certainly a better choice in terms of yield, it's possible that it's worthwhile to pay Exxon Mobil's premium for a more reliable company.
Oil majors are decent values at this point in time. We find both BP and Total interesting from either a pure value outlook or an income perspective, with the only questions being whether a value investor would consider Exxon Mobil to be a safer enough stock that it is worth paying a moderate premium in terms of 2013 expected earnings.
Disclosure: I am long COP.