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ExxonMobil (XOM), Chevron (CVX) and ConocoPhillips (COP) are the American oil Juggernauts. The purpose of this article is to discuss the advantages of a long-term investment in these Juggernauts, as opposed to a mini integrated major such as Marathon Oil (MRO) or an independent oil company.

(XOM), (CVX) and (COP) have a combined market capitalization that is $430 billion greater than the 3 integrated oil companies -- Occidental Petroleum (OXY), (MRO), Hess (HES) combined -- plus 5 of the largest independents listed in Table A below:

Table A

MARKET

CAPITALIZATION

($Billion)

Shares Outstanding

(Billion)

Share Price

$

XOM

400

4.4

90

CVX

228

1.9

120

COP

73

1.2

68

OXY

71

.8

88

MRO

24

.7

35

HES

21.5

.34

64

SU

44

1.5

29

APC

42.5

.5

85

EOG

35

.27

130

DVN

21.2

.4

52

CHK

13.6

.65

21

(COP) became a non-integrated major when it spun off its downstream operations to its shareholders to form Phillips 66 (PSX) in 2012, which if you agree with Mark J. Kaiser and Yunke Yu in the two-part article “oil and gas company valuation, reserves, and production” (linked below) that the present day value of an integrated oil company’s proved reserves equals its market capitalization, means that you get the refineries, service stations, chemical plants, and the rest of their assets gratis.

http://www.ogfj.com/articles/print/volume-9/issue-2/features/part-1-oil-and-gas-company.html

http://www.ogfj.com/articles/print/volume-9/issue-3/features/oil-and-gas-company-valuation.html

This would also make ExxonMobil (XOM) and Chevron (CVX) great long-term investments if they decide to divest their downstream operations in the future.

The value of an oil company is based on its proved reserves and its ability to produce and replace them profitably. The juggernauts have an average of almost 16 billion barrels oil equivalent (BOE) proved reserves compared to just more than 2 BOE for the others in Table B, which gives them a Hall of Fame exploration average when compared to the competition.

Also, each share of the Juggernauts’ stock is backed up by almost 7 barrels of proved reserves compared to 4 barrels for the others in Table B. Just as important, however, is the fact that the Juggernauts' reserves are diversified and not all in one basket should the cost of production exceed profitability, which could be the case for (MRO), Suncor Energy (SU) and others whose futures are tied to oil shale and tar sands, which have high production costs.

Table B

Proved BOE

(Billion)

Shares Outstanding

(Billion)

Proved Barrels per Share

XOM

25.1

4.4

5.7

CVX

11.3

1.9

6

COP

10.7

1.2

8.9

OXY

2.8

.8

3.5

MRO

2

.7

2.8

HES

1.3

.34

3.8

SU

2

1.5

2.8

APC

2.4

.5

4.8

EOG

1.5

.27

5.5

DVN

2.5

.4

6.3

There is always risk that Saudi Arabia, Iran, Iraq and other OPEC members will be forced to sell their oil at lower prices or watch their cities burn. In the mid-1980s, OPEC flooded the market with $10 oil, which crippled many of the independents who couldn’t repay their bank loans that were collateralized with their proved reserves. This brought exploration to a standstill and created buying opportunities for the Juggernauts. What's more, it could happen again and the production from the Bakken and the Canadian Tar Sands would be unprofitable.

Not only are the Juggernauts’ reserves spread around the world, they have the financial resources and technology to produce and replace their reserves in mega ventures with other foreign major oil companies that are out of the reach of the independents.

Note in Table C that the Juggernauts’ EPS are almost $10 per share compared to $1.95 for the others, and also that Devon Energy (DVN) and Chesapeake Energy (CHK) lost money and have P/Es of 10 or under while all but one of the independents are +50 or don’t have any earnings.

Table C

EPS

$

P/E

DIV

%

DEBT

$Billions

XOM

9.80

9.8

2.8

13

CVX

13.2

9

3.4

14

COP

6.6

10

4.4

25

OXY

5.4

16

2.9

7.6

MRO

2.8

16

2.0

6.5

HES

8.0

8.3

.60

7.3

SU*

1.6

18

2.6

11.6

APC

1.4

63

.40

14.8

EOG

2.7

50

.60

6.2

DVN

-5.0

-

0.0

12.2

CHK

-1.3

-

1.7

13.6

The Juggernauts have 700 billion BOE of proven reserves, a long history of exploratory excellence, and the financial resources and technology to participate with other majors in mega projects to replace their reserves. For all these reasons, I think (XOM), (CVX) and (COP) are the best long- term energy investments.

Source: The Oil Juggernauts