After a great 2012, big oil stocks have had a bit of a bumpy ride in 2013. European recession, Chinese disappointing growth, expanding U.S. oil production and a sluggish U.S. economy have worried investors about dampened oil prices. Yet, amidst the waves of uncertainty there may be some values for sharp-eyed investors.
I evaluated five big oils stocks to see if any look to be good values right now: Exxon Mobil (XOM), PetroChina (PTR), Royal Dutch Shell (RDS.A) (RDS.B), Chevron (CVX) and BP (BP). I last took a long look at these big oil stocks in September of 2012. In that article we concluded that at that time Chevron was the best buy of the group, while PetroChina was a definitive sell. Since then the price movements for these stocks have been as follows:
BP data by YCharts
By skill or luck the group performed fairly well in line with our expectations. PetroChina originally climbed from just under $120 to into the $140s before starting a slide in February to a level under $108. Chevron was around $110 and originally dipped close to $103 before rallying to $125 at the start of June. The company has slid back as oil stocks have been pummeled by the market the last two weeks.
So what is in the future?
The Big Picture
Europe entangled in a stubborn recession, while the U.S. economy is weakly growing despite Fed warnings of Quantitative Easing going away, true, but what is the worry about oil? Prices are still high and profitable:
WTI Crude Oil Spot Price data by YCharts
Yes, the benchmark Brent Crude has been sliding down the past 12 months, but is still above $100. Meanwhile West Texas Intermediate has been in an ever narrowing trading range of $90-$98 recently.
International factors are doing their bit to keep prices up. China has been wheeling and dealing with Ecuador, Venezuela, Iran and anyone else they can to tie up future oil production to feed its ravening industrial beast. Continued unrest worries watchers in Israel/Palestine, Iran's argued nuclear ambitions appear to be grinding to a head with Israel, Turkey and Egypt are swamped in political turmoil, while Venezuela deals with mounting political instability. Future risks are high with no end in sight.
True, Canadian and U.S. oil sands and shale production is continuing to surge, but the dampening supply effect they should be providing continues to be stalled by infrastructure that always seems to be two steps behind production. Just last week Canadian pipeline operator Enbridge shut down a pipeline after a small spill gave fears to recent flooding undermining the pipelines. Meanwhile Nigeria's output continues to stall as local groups continue to damage pipelines.
Mark Waggoner of Excel Futures, one of the more bearish oil observers, said U.S. crude may drop as low as $84. Even at that level, oil companies are going to be making solid profits. There is nothing on the horizon to even suggest that oil could plummet down to the black depths of a sub $70, the line where many companies will start losing money on their production.
So we have economic concerns tangled with diverging market forces. Through all of this tangled landscape, how have our big oil competitors fared recently:
BP PE Ratio TTM data by YCharts
BP continues to be struggling through troubled waters. Their legal problems from the 2010 Deepwater Horizon spill, with both criminal and civil legal actions glacially grinding their way through the courts, still posing uncertainty that put a lid on the shares. At the same time, the company has closed on selling its interest to the Russian TNK joint venture when it sold its stake to Rosneft (OTC:RNFTF) for $12.48 billion plus shares in the Russian oil producer.
The company has had profits impacted by asset write downs due to low liquid natural gas prices. Yet price-to-book remains at a very reasonable 1.4, while PE for the trailing twelve months is under 6. With a recent price under $42, a dividend yield over 5%, current valuation is low even taking into account the uncertainty of the company. Meanwhile BP's balance sheet is solid with a current ratio above 1.4.
Meanwhile BP is not letting past troubles hinder future growth. BP has agreed to an undisclosed price for gas produced from Oman's Khazzan project.
While prices still will be depressed for some time to come, long term prospects look good. BP is an excellent investment for investors with long term horizons. They can accumulate shares now and enjoy the dividend until the legal anchors are cast off.
CVX PE Ratio TTM data by YCharts
Like BP, Chevron has been negotiating some environmental minefields. Chevron has recently come under fire in Poland, as residents of a village in Warsaw claim Chevron does not have the proper permits to begin exploration in their region. CVX claims they do in fact have the proper permits and that their exploration plans are progressing. Meanwhile Chevron continues to deal with the political and legal convolutions they inherited between Texaco and Ecuador over pollution claims.
Chevron has taken a page from Conoco Phillips (COP) and has completed a plan to divest itself of a number of refining assets so that it can concentrate on historically higher margin production. At the same time it is moving towards a greater exposure to Asian production. Provided the Indian and Chinese economies continue to advance long term, this should be a positive.
Chevron is a bit pricier than BP, with a PE (TTM) just below 9, a price-to-book above 1.6. However it is also a little farther along on its development curve which seems to be priced in. The dividend stands at 3.38%.
Those wanting a less choppy future might want a new position in Chevron. For me there is enough upside to hold, but there is less upside and less dividend to really establish new positions.
XOM PE Ratio TTM data by YCharts
Exxon is in the first year of a massive capital expenditure plan. From 2013-3017 the company plans to spend an average of $28 billion per year (not including acquisitions) in major exploration and drilling developments in Canadian Sands and Arctic Sea asset fields.
Exxon announced it is moving forward with its liquefied natural gas development in Russia with counterpart, Rosneft. The Russian oil producer will hold 51% interest and XOM will own the rest in this new joint venture.
That makes Rosneft a big player in the future of both BP and Exxon.
Exxon is a cost leader in many areas of the energy production and refining sector. The company states that it believes it has a 10% cost advantage over refining competitors while its drilling and transportation elements also top its competitor's in productivity. Long term, this is a profitable, well run company. The price reflects this with a price-to-book over 2.4 and a dividend climbing but still less than 2.6%.
I applaud Exxon's future investment but it will be several years before anything important comes from it. Meanwhile the price of the company seems reasonable but no true bargain. This would be a good company to hold long term.
PTR PE Ratio TTM data by YCharts
I'll start off and disclose that I am a massive skeptic in Chinese companies. In part, due to the unique Chinese Communist model the state controls all investment within the country as government bodies must own a minimum of 51% of all companies operating within its borders. This puts lots of restrictions and pressures on these companies as they often must bend to the will of the ruling party and their often corrupt politicians. Add that to some shaky corporate structuring that often seem to violate minimum SEC requirements, with a growing list of Chinese accounting scandals, and my hands start to shake whenever I pick up a Chinese company financial statement.
It is not that I dismiss Chinese companies out of hand, but that I always approach a Chinese venture as naturally much riskier than most other international investments.
PetroChina always comes down to how well will China's economy grow. The recent liquidity crunch highlighted problems with the new Chinese leadership's upcoming struggles with fundamental problems with state price controls and a potential credit bubble. So while China's economy still has a long potential for growth, short term there can be some incredibly choppy waters ahead.
PetroChina recently announced that they have begun construction on the nation's first shale pipeline. The pipeline will span 58 miles and will have a daily transport volume of 4.5 million cubic meters. China has the world's largest shale gas resources and PTR is well positioned to bridge the gap between the shale reserves and the nascent growth of the Chinese economy.
Share price wise it is a mixed-bag. The book value reads at a very low 1.1, although I am suspicious of that number, again because of Chinese accounting practices and government price controls. The PE is above 11 but it does give a 3.64% dividend yield. While upside remains tremendous, in the short term I see lots of dangers and I would avoid PetroChina until the new government's potential economic reform policies become clearer.
ROYAL DUTCH SHELL
RDS.A PE Ratio TTM data by YCharts
Shell has been busy in both good and bad ways. Another Nigeria problem as a pipeline operated by Shell caught fire in Nigeria after an oil spill. As of this writing the damages and downtime are still being estimated. Meanwhile Shell has also announced that they will spend $1.5 billion on a pipeline in Nigeria that carried 150,000 barrels of crude per day. Shell also said it will spend up to $2.4 billion in the area on gas supply and infrastructure projects. The company is estimated a peak production amount of 215,000 barrels of oil per day.
Shell also announced a buyback of shares on 6/21; RDS.B purchased at a price of 2145.18 pence per share.
Shell is in the middle of a large restructuring plan. It is late amongst their competition in moving to shed refining assets in Europe and Africa. This should provide a cash infusion as it goes as Exxon plans in bringing more emphasis into Asia. Here, though Shell is ahead of Exxon's curve, since Shell already has a large presence in the Japanese market.
The price looks to be a bargain at the moment, with a PE at 7.7, a low price-to-book just above 1.1 and a hefty 4.4% dividend.
Hold on to RDS.A stock if you've got it, and right now looks to be a good time since shares are on the low end, but could rise quickly upon the recent announcement of expansion in Nigeria. Shell is definitely a stock to watch.