We recently considered investing in BP PLC (BP) pursuant to a tip from a colleague of ours. We understand that he was one of the few brave souls willing to take a position in it in 2010 when it was reeling from the Deepwater Horizon oil spill that took place during the "Recovery Summer of 2010." Although the oil and gas sector isn't our favorite sector because of the volatility of commodity prices as well as the lack of differentiated products that each company sells, we are aware that integrated oil companies are strong cash cows that pay out gargantuan sums to the shareholders in the form of dividends and share repurchases. If we were to invest our own capital in the integrated petroleum sector, we'd strongly prefer Exxon Mobil (XOM) or Chevron (CVX) instead of BP as BP's performance since oil prices spiked in 2001 has trailed Exxon Mobil and Chevron.
Source: Morningstar Direct
We understand that BP's dividend yield of 5.2% is higher than Chevron (3.42%) and Exxon Mobil (2.85%). However, it is worth noting that BP had to cut its dividend by 50% in the wake of the Deepwater Horizon oil spill that took place from April to July 2010. We were surprised that BP's dividend growth from 2001 to 2010 was higher than XOM or CVX. Looking back at Exxon's performance in 1989, we were also surprised the company was able to maintain its dividend in the wake of the Exxon Valdez disaster. Although BP's dividend yield is higher than its two larger peers, its dividend payout ratio of 43% is higher than that of Exxon Mobil (31%) and Chevron (32%), respectively, and as such we expect stronger dividend growth from CVX and XOM than BP.
Source: Morningstar Direct
Top 20 Equity Holders
One advantage that BP has against XOM and CVX is that its relatively smaller market capitalization enables it to count more deep-value investment managers as part of its Top 20 Equity holders. BP's three largest active managers include Franklin Advisers (Franklin Templeton), Barrow, Hanley, Mewhinney & Strauss LLC and the Baupost Group. Franklin holds 26.46M shares (83bp of BP's shares) as of Q1 2013 primarily through its well-regarded Franklin Income mutual fund (22M in Franklin Income specifically). Barrow Hanley owns 23.1M (72bp) primarily through Vanguard mutual funds that it sub-advises and it also added 9.8M shares to its position in Q1 2013. Baupost has 17.1M shares (54bp) of BP which represents 23.33% of its AUMs and it increased its position by 6.2M in Q1 2013. Other notable investors include Taconic Capital Advisors L.P. (12M shares, 38bp of BP's outstanding stock, 2.6M in new shares added in Q1 2013 and 19.2% of its AUMs).
Exxon Mobil and Chevron don't have any notable active deep-value investment managers as part of its Top 20 Equity Holders but each firm is well represented by the large ETF and index-based sponsoring firms. Cliff Asness of AQR Capital Management owns 3.2M shares of XOM ($288M) and 1.8M shares of CVX ($216M) as of Q1 2013. Adage Capital Management has 5.3M shares of XOM ($480M) and 2.75M shares of CVX ($326.5M). Fisher Asset Management has 4.6M shares of XOM ($414.5M) and 3.6M shares of CVX ($426.7M).
BP has the lowest forward PE (8.24X) in comparison to XOM (11X) and CVX (9.4X). BP even has a higher projected long-term growth rate (4%) than XOM (1.2%). Of course CVX has a higher projected long-term growth rate (6.8%) than BP. Although BP has a lower Forward PE than Chevron and although BP has 60% more revenue than Chevron, Chevron's adjusted profit was 60% higher than BP's. We think this explains why Chevron trades at a Price to Book Value of 1.6X while BP trades at a P/BV of 1.0X. CVX's Price to Sales (1.0X) is higher than BP's (0.3X) yet both firms trade at a Price to Cash Flows of 6.3X.
Source: Morningstar Direct
Capital and Business Efficiency Ratios
- Profit Margin: CVX (10.88%), XOM (9.6%) and BP (5.7%)
- ROIC: CVX (17.91%), XOM (23.81%) and BP (12.79%)
- Debt/Assets: CVX (5.92%), XOM (3.95%) and BP (14.93%)
- Inventory Turnover: CVX (19.65X), XOM (21.05X) and BP (11.11X)
- CapEx/Sales: CVX (13.96%), XOM (7.26%) and BP (5.87%)
We're not particularly bullish on the sector as we believe that hydraulic fracturing has served as a game-changer with regards to the production of oil and gas. As consumers of oil and natural gas, we love fracking because it has helped to contain the price of oil and gas relative to the levels achieved in 2008. As investors, we believe that this has resulted in PEs of 11 or less as well as single digit projected growth rates for BP, Chevron and Exxon Mobil. Here are four more factors why we believe that oil/natural gas prices will be contained or potentially declining over the near term time period:
- The formerly hot emerging markets like China are starting to cool off
- The Eurozone is suffering under a continually stagnant economy
- The US market showing signs of weakness due to the upcoming implementation of ObamaCare
- The Federal Reserve is hinting that it will slow down its money printing program
In conclusion, we believe that if investors insist on including a gargantuan integrated multinational oil behemoth in their portfolio, we believe that Chevron offers investors the best risk-reward value proposition. We originally set out to analyze BP at the behest of a colleague of ours but we concluded that Chevron and Exxon Mobil are stronger companies that have more competitive advantages than BP. We can understand why Morningstar gave Exxon Mobil a Wide Economic Moat Rating versus a Narrow Economic Moat Rating for BP. We were surprised that Chevron's Economic Moat Rating was only Narrow because it has more better financial performance and management than BP. We understand that BP has had a remarkable comeback over the last three years however it still has a way to go before it catches up to Chevron or Exxon Mobil.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.