When one thinks of investing in the oil and gas space, at times it becomes difficult to think beyond the leading companies such as Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM) and ConocoPhilips (NYSE:COP). This is rightly so because these are market leaders with impressive dividend histories and have provided handsome returns to investors. These are excellent stocks for your IRA; stocks that you can live on. Still, when it comes to investing, you may be constrained to choose only one due to one reason or the other.
Currently, Chevron in my opinion is a great stock as it has good things going in its favor. The most important among them being plans for future growth. Let us have a look.
A $233 billion company, Chevron is engaged in practically all things related to oil and gas through its Upstream and Downstream segments. Apart from oil, gas, lubricants, additives, petrochemicals and plastics the company also engages in mining of coal and molybdenum and operations related to debt financing, cash management, insurance, real estate and energy services. The company has 11 power assets with generating capacity of roughly 2,200 megawatts.
A 3% dividend yield, earnings per share of $13.32 and a solid balance sheet showing total assets of $232.98 billion including more than $47 billion in cash and short and long term investments are some of the commonly cited reasons why Chevron is a safe bet. But one can say that for Exxon and ConocoPhillips as well. However, Chevron has solid plans for future growth.
A report published last week by Morgan Stanley analyst Evan Calio states that Chevron has a relatively higher production growth at a compounded annual growth rate of more than 5%. In addition, by 2017 the company's return on capital employed (ROCE) is expected to improve by more than 20%. The analyst studied top 15 growth projects of both Chevron and Exxon to arrive at his conclusion that Chevron's projects provide 4% higher upstream returns over five years.
The Morgan Stanley report assumes even more credence when viewed in light of the fact that Chevron's annual reports reveal that the company has been reporting improved operating and net profit margins consistently over at least four of the last five years.
Chevron's operating profit margin increased nearly 25% in five years, from 16.25% in 2008 to 20.09% in 2012 against the industry average of 13.99%. An almost similar increase is shown in net profit margin as well. Against the industry average of 7.84%, Chevron reports net profit margin of 11.35%. Chevron's nearest rival, Exxon Mobil, on the other hand, reported lower margins with operating margin of 16.32% and profit margin of 12.07%.
Chevron Vs. Exxon Mobil
Both Chevron and Exxon reported excellent results last month. For the year ended December 2012, Chevron reported revenue of $241.91 billion while Exxon's revenue was almost two times at $482.30 billion. However, in Chevron's case, revenue per share is $114.14 against $92.56 for Exxon. There is also a wide difference between net income available to common shares - $44.88 billion (Exxon) and $26.18 billion (Chevron). However, Chevron's Q4 EPS is $2.98 against $2.2 of Exxon. The difference between trailing twelve month earnings per share of the two companies is much greater with Chevron's EPS at $13.32 and that of Exxon at $9.70.
Whereas Chevron reported a year-on-year increase of 1.1% in upstream production, Exxon's production actually reduced by 5.2%. On March 12, 2013, Chevron announced that it is increasing its production this year in a small way and is well on its way for 25% production growth by 2017. The company is focusing on onshore unconventional fields in North America and has also bought some of Chesapeake Energy Corporation's assets in the Permian Basin in September.
ConocoPhillips is an integrated company engaged in oil and gas exploration, production and refining until it spun off its downstream operations into an independent company, Phillips 66. As such it cannot be exactly termed as a competitor of Chevron in the strict meaning of the term. However, you may look into it for a healthy comparison.
As compared to Chevron and Exxon, ConocoPhillps is a much smaller company with a market cap of $72.48 billion. Investment in this company will provide you with a dividend yield of 4.45%, which is higher than both Chevron and Exxon. ConocoPhillips also has higher operating margin of 24.05%. The company reported total revenue of $60.35 billion, which translates into $48.52 per share.
The fact of the matter is that all three - Chevron, Exxon and ConocoPhillips - are great companies. All three or any one of them should be a part of your portfolio. Despite the recent uptrend in the stock market and the benchmark S&P 500 Index having gained 16% in last one year, these three are still trading at attractive P/E multiples of around 10.
It is actually a matter of choice depending upon your outlook. ConocoPhillips is not an integrated company anymore and a pure play in exploration and production of oil and gas after the separation of the refining segment. It may be some time before it becomes clear which direction the company is headed. Valuation wise, Exxon Mobil is the largest U.S. oil and gas company with a dividend yield of 2.56%. Chevron, although a smaller company in comparison, has a higher dividend yield at 3% and well positioned for future growth. Also, it has a slightly more attractive forward P/E ratio as compared to Exxon.
As a discerning investor, if I could, I would divide my investment dollar between all three with a marked preference for Chevron because of the growth potential. If that was not possible, I would prefer Chevron and wait before I can buy the other two.