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Introduction

Exxon Mobil (NYSE:XOM) is the world's largest publicly traded petroleum company. Chevron (NYSE:CVX) is the second largest U.S energy company. ConocoPhillips (NYSE:COP) has done major restructuring, which has freed up $12 billion to be re-allocated. Today, innovation and efficient production count far more in the petroleum industry than before due to volatile oil prices, which leave oil industry companies helpless in how much they get for the black gold they sell. My aim today is to find the best option from the three, based on empirical, financial and stock market performances.

Recent Events

XOM's earnings in Q4 2012 had a 6% year-on-year growth to $9.95 billion. Furthermore, it also had an annual 9% year-on-year increase to $44.88 million. Earlier in 2013, it was announced that XOM has regulatory approval to take over Celtic Exploration Limited for $3.1 billion, which will allow XOM to have control over approximately 221,000 hectares of natural gas. Most of the company's revenue comes from the upstream segment, which has been replenished with the addition of 1.8 billion barrels of oil equivalents to its proven reserves in 2012.

CVX posted an unprecedented profit growth of 41% year-on-year and a $7.25 billion profit growth for Q4 2012 due to strong and effective refining operations. The company is focused on providing an increased value as opposed to increased volume, which is a positive step for investors. As the price of crude oil continues to grow in the international market, CVX stands to benefit from the fact that most of the company's oil utilized in the U.S. comes from abroad, which provides higher revenue for the seller. The company is also in a $52 billion LNG joint-production operation at Gorgon, Australia. Gorgon will produce the equivalent of 450,000 barrels of oil per day and Chevron can lay claim to half of it in 2014.

ConocoPhillips has been altering its past trend of acquiring smaller companies and is instead focusing on organic growth. The company has also restructured massively while spinning off its refining operations under the name Phillips 66 (NYSE:PSX). The restructuring has brought cash influx of $12 billion, while its ambitious plans for Alaska, Bakken, Eagle Ford and the Permian Basin remain on course. ConocoPhillips plans to grow and have capital spending of $16 billion from 2013 to 2017. A total expense of $25 billion is expected to add 365,000 barrels of oil equivalents per day. However, from an investor's perspective, I would like to see cash on the balance sheet from operations and not asset sales.

Financial and Stock Review

In the illustration below, the price chart of the three companies over the past five years is displayed against Standard and Poor's 500 market index and the Dow Jones Industrial Average economic data. Chevron has outperformed the market and its peers as it has grown by 39.94%. The company's drilling and refining have helped it outperform its giant competitor consistently for the past 3 years. While revenue has increased over the past three years, Chevron has also been increasing its dividend per share, which stood at $3.51 for the year 2012 with a payout ratio of a healthy 26.4%. On the bottom end, ConocoPhillips has been trailing its peers all throughout the three years, but major changes have shifted the focus and operations of the company.


(Click to enlarge)

Chevron has been increasing its 52-week range recently and currently trades at $118.95. The bracket ranges from $95.73 to $118.55. Exxon's 52-week range is from $77.13 to $93.67 and it currently trades at $88.95. ConocoPhillips' 52-week range is from $50.62 to $78.11 and it currently trades at $59.39.

Indicator

Exxon Mobil

Chevron

ConocoPhillips

Price/Earnings ttm

9.18

8.90

9.88

Price/Book

2.4

1.7

1.5

EPS Growth

(3 Year Avg.)

34.6

36.5

31.7

Dividend Yield, %

2.56

3.04

4.52

Debt/Equity

0.0

0.1

0.4

Return on Equity

28.0

20.3

14.9

Current Price

$88.95

$118.55

$58.39

Estimated Fair Value Range

$141-$178

$200-$270

$91-$130

Stock Valuation

Undervalued

Undervalued

Undervalued

Upside Potential to Reach Fair Value

59%

68%

55%

Data from Morningstar and Financial Visualizations on March 11, 2013

The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the three competitors, suggests that currently all stocks are well undervalued. In addition, EFS' fair stock price valuation indicates that currently Chevron is trading at the most attractive discount. At a price of $118.55, CVX is trading at a significant discount. The stock has 68% upside potential to reach its fair value.

ConocoPhillips is the most inexpensive option of the three under review, though it provides the highest dividend yield. At 4.52% yield, the company has a payout ratio of 44.7%, which is perhaps on a high side and should be expected to drop down in the coming years as the refining business has been spun off and the cash from overseas asset sales is being re-invested in northern America. It can also use its abundance of cash to reduce its debt/equity ratio, which is higher than the competition. In a cyclical industry like oil exploration and sales, earnings are largely dictated by the global crude oil prices, underlined by the more or less uniform EPS provided by the three companies, which leaves little to choose among them from the earnings point of view. The P/E ratio favors Chevron, as it has the lowest value in an industry where a lot of companies have been facing losses due to global slowdown and decreased demand for commodities.

Keeping in mind the fact that XOM is battling with AAPL on grounds of having the highest market capitalization on the U.S. stock market, a 2.56% dividend yield is pretty respectable but it is undoubtedly outdone by CVX and COP. For the year 2012, XOM spent $10 billion in providing dividends to its shareholders and is expected to spend 10.7 billion in the coming year, making it the world's largest dividend payer. CVX spent an approximated $7 billion and COP spent approximately $3 billion for the same purpose.

Make or Break for Investors

In the oil and gas industry, technological advancements have led to increasing output in a situation where natural gas reserves are depleting. As reserves deplete, the cost of finding more reserves and extracting them becomes pivotal. The three companies under discussion are undoubtedly pioneers at doing just that. XOM and CVX are relying on share buybacks to enhance shareholder value, which is perhaps one way to make the stock more valuable. However, organic growth and minimizing costs is a more effective method of adding value since it is more sustainable. Furthermore, CVX's future depends on the fortunes of the Gorgon project. Exxon starts production at 22 major projects over the next three years, including expanding the Kearl oil sands operation in Alberta, Canada, and exploration in the Russian Arctic. These will define the stock performance of XOM.

In my opinion, CVX's solid run of results and expansion strategies will continue into 2013 and especially 2014, when the Gorgon project comes online. While XOM is a formidable option and COP a sensible investment now that they are more focused, with the future prospects in mind and financial standing considered, I suggest Chevron stock over Exxon Mobil and ConocoPhillips.

Morningstar provides the following ratings for the three stocks: XOM - 2/6 buy, 3/6 hold. CVX - 4/10 buy, 2/10 outperform, 4/10 hold. COP - 6/12 buy, 4/12 hold, 2/12 sell.

Bottom Line

While Exxon Mobil beats Chevron in proven reserves and production of oil and gas in numbers, Chevron manages to make more dollars from one barrel of oil than any of its rivals, i.e., it is more profitable. I believe CVX will continue increasing its dividend over the next year and it is a very attractive long-term, integrated energy investment.

Source: Exxon Mobil, Chevron And ConocoPhillips: Don't Miss This 'Great Buy' Time