## introduction

There are too many articles on Seeking Alpha concerning the top oil companies. These companies have a very similar story to tell. They are selling at relative price multiples that are below or close to the industry average. These companies have an attractive dividend yield. Their performances were poor during the recession years, but are now showing signs of recovery. There is a positive trend in the cash flows they are generating. They are reducing their asset bases and thus are in better cash positions than they have been at any time in the last five years. However, the important question is which one is the best bargain among the oil stocks? There is limited analyses comparing the oil majors on similar metrics, even though many analysts are making separate arguments built along the same lines.

Today, we are going to compare the **Exxon Mobil Corp**. (NYSE:XOM) to its industry competitors, **Chevron **(NYSE:CVX) and **Conoco Philipps** (NYSE:COP), and track the latest investment status of each. Exxon was organized in the state of New Jersey in 1882, and is an American multinational oil and gas corporation located in Irving, Texas. In 1999 there was a merger of Exxon and Mobil, both heirs of the John D. Rockefeller corporation. The company has been a leader in the energy industry since the beginnings - more than 100 years ago. With its very good reputation, will Exxon be still holding the crown in the future? Moving on, let us find out how the three energy companies were valued and how they compare with each other financially.

## Deep Finance Expertise

The investment valuation on Exxon Mobil, Chevron and Conoco Philipps will be based upon the **Pricing Model,** which is prepared in a very simple and easy way to value a company for business valuation purposes. This valuation adopts the investment style of Benjamin Graham, the father of value investing.

My basis of valuation is the company's last five years of financial records - the balance sheet, income statement and cash flow statement. In my valuation, first I will calculate the discounted cash flow, then the enterprise value and finally, the margin of safety. The relative method was considered as well. Now, let us walk step by step.

**1.** **The Discounted Cash Flow Analysis**

Today, I am going to share with you the discounted cash flow analysis, which is based upon the five-year historical financial data of Exxon, Chevron and Conoco Philipps to arrive at the projected cash flows. The discounted cash flow is one way to decide if the investment is worthwhile. It is the expected cash that the company can generate. It does not predict the future, but it uses the historical data to project a future financial picture so that readers may understand the parameters that are not easily understood without using a spreadsheet. The table below is the summary I have gathered from the spreadsheet.*(click to enlarge)*

The capitalization rate that was used was 15% while, the return on investment and price to earnings that was used in this calculation was the average from 2008. For COP, I used the median ROI rate. On the other hand, the rate used in the calculation of the present value and the future value was the average ROI less the average percentage of dividends.

Going forward, the calculated present value of the equity was 43.36, 79.93 and 42.38 USD per share, at a rate of 20.65, 14.54 and 11.93% (net of dividends) for XOM, CVX and COP, respectively. The future value per share was $91.87, $137.57 and $66.52, giving us 112, 72 and 57% increases, respectively. The future value is equal to the present value and this means having a choice of taking the amount of the present value today or wait for the 5 time periods to have the future value. If you take the present value today, you will have a chance to reinvest the money with the same rate with equal time periods and will end up having more than the present value.

Now, let us walk further and see what's up with net income. The present value of the net income was $58, $28 and $6.9 billion for XOM, CVX and COP, respectively. The calculated net income per share on the 5th year was 25.3, 28.57 and 11.02 USD with a value of $117, $55.7 and $13.8 billion for XOM, CVX and COP, respectively.

## 2. The Enterprise Value Approach

The enterprise value is the present value of the entire company. It measures the value of the productive assets that produced its product or services, and both the equity capital (market capitalization) and debt capital. Market capitalization is the total value of the company's equity shares. In essence, it is a company's theoretical takeover price, because the buyer would have to buy all of the stock and pay off the existing debt, pocketing any remaining cash. This gives the buyer solid grounds for making an offer.

Going forward, let us walk through the table below as a summary for the calculation of the enterprise value:

The market capitalization of XOM is stable at $380 billion, while CVX's market capitalization has been increasing at a rate of 57% from for the last five years from 2008. In addition, the market capitalization of COP was also increasing at a rate of 22 % for the past five years since 2008.

The takeover values of the entire companies of XOM, CVX and COP to date**, May 1, 2013** are $400.7, $227 and $91.9 billion at a per share price of $86.58, $116.5 and $73.35, compared to their market prices to date of $88.99, $122.01 and $60.45 per share, respectively. Moreover, the total debt was less than the cash and cash equivalents for XOM and CVX, while COP has more debt than cash and cash equivalents. Therefore, buying the entire business would entail paying 100% of the equity and zero debt for XOM and CVX, while for COP, it would entail 77% of for the equity and 23% for the debt.

## 3. The Net Current Asset Value Approach

Benjamin Graham's Net Current Asset Value (NCAV) method is well known in the value investing community. Graham was looking for firms trading so cheaply that there was little danger of the stock prices falling further. The object of this method is to identify stocks trading at a discount to the company's Net Current Asset Value per Share, specifically at two-thirds or 66% of net current asset value. The formula for the net current asset value is: NCAV = Current Assets - Current Liabilities.

The net current asset value approach of Benjamin Graham tells us that the stock prices are overvalued for of XOM, CVX and COP, because these are trading above the liquidation value of the company.

## 4. Benjamin Graham's Margin of Safety

The Margin of Safety is the difference between a company's value and its price. Value investing is based upon the assumption that two values are attached to all companies - the market price and a company's business value or true value. Graham called it the intrinsic value. Value investing is buying with a sufficient margin of safety.

The question is, however, how large of a margin of safety is needed to be considered sufficient? Graham considers buying when the market price is considerably lower, a minimum of 40%, than the real or true value of the stock.

Let us find out the average margin of safety for XOM, CVX and COP. Remember the historical data which was gathered for each company as we take into consideration the prior period's performances.

Looking at table above, there was a sufficient average margin of safety for each company because the price is less than the true value of the stock for XOM, CVX and COP. Therefore, their stocks are good candidates for buying because the stock passed the requirement of Benjamin Graham of being 40% below the true value of the stock.

Going forward, let me show you the formula for the intrinsic value or the true value of the

stock, as it factors into the calculations for the margin of safety.

The formula for intrinsic value is:

## Intrinsic Value = EPS * (9 + 2G)

The explanation of the calculation of intrinsic value is as follows:

*EPS -- the company's last 12-month earnings per share;*

*G -- the company's long-term (five years) sustainable growth estimate;*

*9 -- the constant which represents the appropriate P/E ratio for a no-growth company as* *proposed by Graham (Graham proposed an 8.5, but I changed it to 9);*

*2 -- the average yield of high-grade corporate bonds.*

Furthermore, here is the summary of the results of the calculations for growth:*(click to enlarge)*

The sustainable growth rate (SGR) shows how fast a company can grow using internally

generated assets without issuing additional debt or equity, while the return on equity shows

how many dollars of earnings result from each dollar of equity.

As shown above, XOM has the highest growth rate followed by CVX. COP has only half of the sustainable growth rate of CVX. This is how fast a company can grow using internally generated assets - without using debt or equity. However, COP provides the highest payout ratio at 34.33%. COP's net margin was lower compared to those of XOM and CVX.

## 4. Relative Valuation Method

The Relative Valuation Method for valuing a stock compares market values of the stock to the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.*(click to enlarge)*

The Price to Earnings/Earnings per Share (P/E*EPS) will determine whether the stock is

undervalued or overvalued by multiplying the P/E ratio by the company's relative EPS and then comparing it to the enterprise value per share. The table above shows that the P/E*EPS ratio was 81.37, 95.92 and 63.08 % of the price for XOM, CVX and COP, respectively. Thus, it tells us that the stock price was undervalued for XOM and CVX because the price is lesser than the P/E*EPS ratio. Likewise, the stock was overvalued for COP because the stock price was higher than the ratios.

Moreover, the EV/EBITDA tells us that it will take 5, 4 and 5 times of the cash earnings of XOM, CVX and COP, respectively, to recover the costs of buying the entire business. In other words, it will take 5, 4 and 5 years to recover the costs of buying.

## Final Verdict

Overall, it indicates that the stock prices of XOM and CVX are undervalued, whereas COP's stock price is overvalued. The three companies are financially healthy. XOM is really financially stable followed by CVX. However, XOM might face a challenge meeting financial obligations in the near future. By contrast, while CVX has the ability to pay its short term obligations, will need to sell some of its inventories to support its long term debt when due dates arrive. COP may have a hard time meeting its obligations. Therefore, I recommend a BUY on the stock of Chevron and EXXON Mobil, whereas a HOLD on the stock of ConocoPhillips.

## Bottom Line

I believe that the best bet from the selection (XOM, CVX and COP) is **Chevron.**

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