Non-renewable forms of energy are dominated by oil and gas, which are becoming increasingly rare: they are difficult to extract, costly to refine and priced expensively on the shelf. In recent times, however, a slight shift has been witnessed, which has benefited all oil producers. Increased production means increased supply; in the short term, this brings about a downward pressing movement on the price equilibrium. Oil companies have been able to benefit from this as their refineries can now run at a higher output level, driving per unit costs down. In this article, I analyze which oil stock has capitalized on this opportunity and which companies should remain strong in the coming years based on their investment planning. The oil and gas companies under review are Exxon Mobil Corp (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A), PetroChina Corp (PTR) and Chevron Corp (CVX).
Financial and Stock Analysis
As January ends, most companies have come out with their Q4 2012 results, providing a unique opportunity for investors to assess momentum and performance. While keeping this in mind, I will also be looking at the numbers, which set aside these stocks from each other.
Royal Dutch Shell Class A
(3 Yr Avg)
Dividend Yield, %
Estimated Fair Value Range
Upside Potential to Reach a Fair Stock Value
Data from Morningstar on Feb 7, 2013
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the four competitors, suggests that currently all stocks (except of RDS.A) are undervalued. In addition, EFS' fair stock price valuation indicates that currently Chevron is trading at the most attractive discount.
Earlier in 2012, Exxon Mobil, along with other refining companies, was told to divest excess refineries and use the capital for better use. The companies chose otherwise, however, and whether it be a stroke of luck or very thorough forecasting, that decision has allowed them to boost Q4 profits by a significant amount. Without these refineries, Exxon Mobil's Q4 2012 in particular would have been largely disappointing. Fuel refining helped spur Q4 2012 net income to a five-year high of almost $9.95 billion for Exxon Mobil at a time when returns from oil and natural gas exploration during the final three months of 2012 lagged significantly because of low commodity prices. The company also dethroned Apple as the most valuable company based on its market capitalization earlier in 2013. Additionally, Exxon Mobil has a very healthy ROE compared with its competitors, and also outperforms with its low debt levels, which are rivaled only by America's No. 2 oil producer, Chevron. However, growth over the past three years has not been positive and the dividend yield provided by this stock, while healthy, is still less than the competition. In 2013, the company needs to look out for the $800 million trial regarding having pre-emptive knowledge about the negative effects of adding methyl tertiary butyl ether to gasoline. The company also does not seem to have any groundbreaking investment projects on the horizon, which paints a bleak picture for the future.
Royal Dutch Shell, Europe's largest oil company, clocked in Q4 2012 results that were below analyst expectations. While the company managed to post a profit of $5.6 billion year-over-year from Q4 2011, investors and shareholders were expecting more. The relative weakness was attributed to lower earnings in its exploration and production business, especially in United States. Shell also estimated that it replaced only 44% of its oil and gas reserves used in 2012. The company does plan to spend more on its capital investment program in 2013, at $33 billion compared to $30 billion in 2012. At the end of Q4, the company announced an increase in dividend payments by 4.7% as well. Furthermore, Shell's stock has a very favorable dividend yield of all its competing companies, while low debt levels and respectable ROE continue to drive growth forward. In the future, however, the company desperately needs to capitalize on market trends and maximize profits.
PetroChina is continuing its push to expand operations further and involve more buyers in its process. Last month, Rolls Royce announced a $75 million contract to provide PetroChina equipment to power the flow of gas in its West-East Pipeline Project. Furthermore, the company's overseas output of oil and gas exceeded 100 million tons in 2012. At about $138, PetroChina stock is the most expensive of all the available options in this discussion. Its debt/equity rests at 0.4, but with the involvement of Chinese government in the company, the debt ratio should not be a huge concern. As the company issues notifications of exceeding previous years' output both domestically and overseas, it is improving its ROE while continuing to add to its resources for expansion purposes. For investors, this is reflected in its 5% averaged earnings growth over the past three years and a healthy dividend of 3.11%.
Chevron has been fined $1 million by Occupational Safety and Hazard due to a fire in its Richmond, California refinery last year. The company also states that it paid $10 million in claims after the fire. Furthermore, in an absurd move, Chevron is taking legal action against investors who challenged the company to improve its environmental impacts. Courtroom battle aside, Chevron posted a 41% gain in net income for Q4 2012. Much like XOM, CVX benefited from its refining prowess. Its high ROE and dividend yield make it very attractive as it carries momentum into the next fiscal year. It has a very manageable debt/equity ratio, placing it in a prime position to fund growth externally; furthermore, with profits rolling in, Chevron seems to be focusing well on market conditions and extracting the best out of them.
Make or Break for Investors
Of the listed oil companies, Chevron is the most attractive stock at the moment due to its ability to generate profits from its refining business. The commodity prices are expected to stay low, which would prevent profits from productions and explorations being enough to keep investors happy. With Q4 2012 as evidence, Chevron is most adept at boosting its profits by using its refining business. This is not to discount the profitability potential of the remaining stocks, but from an investor's point of view, this is the most logical conclusion due to the share prices of the remaining stocks. Chevron remains to be a relatively cheap buy, which offers brilliant value for money.
Morningstar provided the following ratings to these oil companies: XOM - 2/5 buy, 3/5 hold. RDS.A - 3/9 buy, 2/9 outperform, 3/9 hold, 1/9 sell. PTR - 1/2 outperform, 1/2 hold. CVX - 4/5 buy, 1/5 outperform.
Commodity stocks can be risky due to shocks in supply, requiring investors to follow them very closely indeed. With that being said, Chevron's cash flow and profitability will allow it to waltz past potential courtroom fines and, based on the evidence from the previous quarter, the competition as well.
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.