What Drives The Share Prices Of Oil Majors?

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Includes: COP, CVX, PSX, RDS.B, XOM
by: Rupert Hargreaves

Obviously there are many different factors that drive share prices. However, as I investigate the oil industry, the main questions that interest me is: What is the biggest influencing factor in share price movements for oil companies? Is it the oil price or improving/falling EPS and how do movements in the oil price affect EPS in general?

To start, here are two charts detailing the EPS of four major oil companies; Chevron (NYSE:CVX), Exxon (NYSE:XOM), Conoco Philips (NYSE:COP) and Royal Dutch Shell (NYSE:RDS.B).

Note: In this article I am using Conoco Philips as an example, although as the company has now spun its refining operations into Philips 66 (NYSE:PSX), it is impossible to gain the historic data for Philips 66 as a separate entity over the past 5 years.

Therefore I am using the historical data for Conoco Philips over the last five years as an example to further reinforce the thesis. As a result this article can also be of use to Philips 66 shareholders as the article to some extent does contain information that will be useful.

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These two charts illustrate the similarity between the EPS of the big four oil companies. Apart from the discrepancy in 2009 they have all remained roughly in-line, usually with no more than a $5 per share variance.

The first chart has values to show the proximity of the results over the timeframe. The second chart has no values to highlight how similar the earnings actually are. Both charts are based on the same data. In addition to the fact that earnings all move in roughly the same pattern, the share prices of all four appear to have the same kind of relationship.

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The share prices of the oil majors all move in the same direction-however, as the companies are all in the same industry and same sector this is nothing unusual. It would be understandable to believe that as the earnings of these four companies all have a similar relationship then the earnings should be driven by some universal factor.

Indeed, It would be easy to state that earnings are driven by the oil price, or at least the refining margins, as the majority of these businesses are refining based - this is not the case however.

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Indexed 100=2008

Starting from the right of the chart, the data is based at 100 in 2008. The difference in the correlation between the oil price and earnings is immediately noticeable. It should be noted that as these are quarterly results and the oil price is floating, there is a lag period between the two. Even after taking this lag period into account the movements in EPS shows very little correlation to the actual price of Brent.

This lack of correlation is understandable, as most of the operations of these oil majors are focused on the refining of oil products. So, how do the refining margins and EPS correlate?

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Once again, based at 100 in 2008 the refining margins actually bear very little correlation the earnings of these companies. Refining margins have been depressed all over the world for the last five years but over that period EPS for the majority of the time have not followed suit.

As a general overview, these are the average correlation figures between oil, refining margins and earnings over the past five years.

Correlation

Oil

Refining

EPS

0.58

0.39

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What About The Share Price?

So far, it has been established that over the past 5-yr period there has been a very small correlation between the refining margins, the oil price and the earnings per share of each company. With that in mind, do these factors affect the share price to any degree? Furthermore, does EPS growth or contraction have any affect on the share price?

Company

Oil

Refining

Correlation against share price movements

XOM

0.58

0.26

COP

0.78

0.53

CVX

0.64

0.28

RDSB

0.85

0.20

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This table shows the correlation between the share prices of each company, compared to the movements in the price of oil and the refining margins.

When the share prices are indexed and then compared to the oil price and refining margins, they provide some very interesting results. Surprisingly, the share prices of the individual company's have more correlation to movements in the price of oil, not to the refining margins.

Royal Dutch Shell has the highest correlation the price of oil -even though over 90% of its operations are involved in the process of refining.

I believe this could be down to the lack of investor knowledge about the refining margin and the lack of information regarding movement's in refining profits.

Share price correlation to EPS

Company

EPS

EPS correlation to share price movements

XOM

0.64

COP

0.76

CVX

0.67

RDSB

0.55

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You could be mistaken for assuming that movements in the earnings and particularly EPS of companies have the ability to move the share price; well, apparently not according to this data. Although, the general correlation appears to be higher than that of the oil price and refining margins, the correlation is still less than 0.8.

Despite this high correlation to the price of oil, Royal Dutch's share price has very little correlation to the gains or falls in EPS the company manages to produce.

The Biggest Driver Of Oil Company Share Prices

Company

Oil

Refining

EPS

S&P 500

Correlation against share price movements

XOM

0.58

0.26

0.64

0.69

COP

0.78

0.53

0.76

0.89

CVX

0.64

0.28

0.67

0.82

RDSB

0.85

0.20

0.55

0.85

Average

0.71

0.32

0.66

0.82

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This is a complete overview of the share price correlation to the various stimuli. The average row at the bottom shows that although the share prices have a high correlation to the price of oil, the biggest correlation and subsequent driver of stock prices is actually the S&P 500.

Surprisingly, according to this data, a gain or fall in the price of oil is likely to have more of an effect on the share prices than a fall or improvement of EPS. However, if the S&P is falling the stock prices will follow that instead.

Finally

This final overview illustrates the discrepancy in the different correlations.

So it would appear that the best driver of oil company share prices is in-fact the rest of the general market and not the prices of oil or their earnings performance.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.