Four Oil Giants to Keep an Eye on - Barron's

2008 was a rocky year for crude prices, and oil giants are feeling the pain of crude more than $100 below July's high. But investors with an eye on the long-run can expect a recovery in both crude prices and oil stock prices at some point. Barron's highlights several oil giants worth thinking about.

1) ExxonMobil (XOM) is the priciest of this list but, cash-rich, is also the most likely to raise its dividend. It has low reserve-replacement costs and a sharp, conservative management team. Its shares have been the most stable of the big energy firms, losing just 6% over the past 12 months. Speculation has been growing as to whether Exxon will make an acquisition, possibly for BG Group (BRGYY.PK) or for all or part of Royal Dutch Shell (RDS.A).

2) Total's (TOT) outlook has improved thanks to the appeal of liquefied natural gas, especially outside the U.S. The company's nat-gas reserves are expected to be bolstered significantly by a recent agreement with Russia's Gazprom. 2008 production was hurt by unexpected shutdowns in Africa and the North Sea. However, European margins were up 88% in Q3, and with low-cost African production and rapid Middle East expansion, Total should do well if oil holds steady or rises. S&P has a 12-month target price of $92 vs. Friday's $47.42

3) BP (BP) earnings will likely take a short-run hit from low crude prices in Russia, where a joint venture contributes around 25% of production. In the meantime, BP has been working on expanding its nat-gas operations. CFO Byron Grote says BP's $3.36-a-year dividend isn't at risk if oil stays in the 40s or higher.

4) Petrobras (PBR) is a smaller player and a more speculative buy than the other firms on this list. It has made some interesting energy discoveries, but not all can be exploited profitably at current petroleum prices. The Brazilian government, which owns around a third of Petrobras, has encouraged the company to return more profits as dividends, so its 3.7% yield could rise slightly this year. Deutsche Bank cut its target to $35 last month, but that's still a gain from Friday's $24.58.

The story is less positive for other big players, including Royal Dutch Shell, ConocoPhillips (COP) and Chevron (CVX). So while long-term industry prospects are positive, investors will have to be picky to find the winning companies.

• Tim Guinness, of the Guinness Atkinson Global Energy Fund, calls all the integrated oil stocks a 'screaming buy' with over 50% upside. He assumes petroleum prices will average $60 in 2010 and $70 in 2011.

Comments

[donzelion:]

I like all four, but the additional risks as I see them are:

BP - with sterling falling, BP's dividend will shrivel, and massive political risk in Russia could void most of the gains
TOT - political risk in Africa and the Middle East is extreme, and often, contracts that were booked as profits have proven to be phantom affairs
PBR - speculative in terms of the proven reserves...despite being sliced in value over the last 6 months, it may still be overvalued

At this point, I've a touch of money in crude itself as an inflation hedge, but am waiting for some more declines before buying the giants

Jan 25 05:22 AM

[Crude Oil T...:]

It is a bit early for Exxon. We are calling for Exxon to report their worst numbers in years Friday morning so you are likely to get XOM on sale. With Exxon being such a large percentage of the DOW it is likely to drag the whole index down Friday.

Jan 25 09:50 AM

[OldLimey:]

Crude Oil Trader: "With Exxon being such a large percentage of the DOW it is likely to drag the whole index down Friday."

Well possible, but the Q4 GDP figure might throw a wrench in the scenario. Consensus expectations seem to be edging down on an almost daily basis, so it's now quite possible that a horrendous 'minus four point something' will be greeted with euphoria as an 'upside miss' (only to be adjusted down next month, of course).

Jan 25 12:17 PM

[Steve Ward:]

Nothing in theBig Oils looks enticing. BP's production growth is alarmingly with Gazprom. Exxon maybe on the hunt for other companies but I wonder about her feelings on shale gas as she ispullingout of the Barrnett Shale.
RD has the most problems along with Conoco Phillips, as a contrarian, I wonder if the opportunities are there instead of the stronger ones.

Jan 25 01:20 PM

[searcher:]

XOM has sober custodians: management and market support. The conservative play here.

Jan 25 01:54 PM

[Pessimistic...:]

With long terrm fundies intact and a debt to cap. ratio or 19% I am long COP. projected earnings alone are for 10X forward, with a loss of EPS almost 5.50 which is figured into pricing. That alone is 7 dollars off 52 week low and SP rates a strong buy??? And their divvy is sitting at $.55. This is going to simmer but it will do so in an upward move over a longer timeframe. I am confidant we will see positive gains possibly sooner as mentioned by Contrarians.

BP on the other hand has a smaller hand to play with about 3.70 trimmed EPS for 09 and only 4.5X forward. They are 3 and some change off 52 week low. Inexpensive stocks, the both, compared to higher priced sector giants. The positive here is the Debt of only 14% and the $.81 dividend which appears to be safe for 09.
Needless to say, I am long here also.

The bottom line is taking these two for a ride is not going to be the most pleasant ride available in this market but for the the price, you will stay belted in with the dividend used as an SRS.

Jan 25 02:59 PM

[PeteK:]

Smaller and more localized companies are better bet than big ones.
Companies such as XCO, BRY, SD are well run companies, and some
dividends too. All affordable to get now.

Jan 25 05:57 PM

[tk77mann:]

Donzelion,

Don't forget oil is priced in dollars, not pounds, so even if the pound crashes BP's earnings and dividends will be issued in dollars. This will be a good thing for UK investors of BP shares.

The major oil companies are a good hedge against the looming inflation we are facing with the huge monetary influx being spent to prop up the economy, IMO.

Jan 25 08:30 PM

[Leonard the...:]

XOM is at least 20% overvalued and trades at a significant premium to it's peers.

That is taking into consideration their top notch balance sheet.

Estimates are for a 40% decrease in earnings this year to 5.51

Given a 10 pe and $6 in cash = $61

They will also have billions in write downs on projects such as the oil sands, the Chavez seizure and other investments in projects that are no longer feasible.

Jan 25 08:39 PM

[prudentinve...:]

I've held XOM for three decades (both as Exxon and as Mobil), and have added to my holdings many times over the years. It is solid and low-risk. It is also pricey, reflecting a flight to safety, so I believe its upside potential is modest from current levels. I also hold other oils, and have added to BP, RDSB, TOT, STO and REP in recent dips. I've held PBR for years, and its done very well, but think its a bit pricey at present.

Jan 25 11:00 PM

[User 305589:]

why the outlook for cop is said to be 'not so good' while on the other hand recommending a high-cost, state-owned company like petrobras really beats me.
how many billions pbr will sink into the newfound big but highly difficult to extraxt oilfields is anybody#s guess. In any case, hey won't make money on those as long as crude stays below 70. PBR a buy?? Please!

Jan 26 08:21 AM

[sr9web:]

If you want to go long engery, buy PWE or PGH, Or for a gas play, buy CHK preferred shares. CHK is ripe for the picking - one of the majors could very well make a move. And if not, you get a good yield.

Jan 26 08:48 PM

[Larry Belle...:]

Wonder if one of these big boys will take a shot at some of the cheaper Oil Sands plays now, such as Suncor or Canadian Oil Sands?

Jan 26 10:07 PM